Are you buying a new home and wondering how it works when paying insurance using escrow? You likely know by now that all homeowners have various costs in addition to their mortgage payments. These expenses can include property taxes and homeowner’s insurance premiums, which can be paid monthly or in larger amounts at certain times of the year. Though it is an unavoidable cost, having an escrow account can help arrange to pay insurance using escrow and make life easier. Here is a thorough explanation of how paying insurance using escrow works.
List of Contents
What is a Mortgage Escrow Account?
A mortgage escrow account is a fund set up by a mortgage lender to pay expenses related to the property, such as homeowner’s insurance and property taxes. A regular savings or checking account is one that an individual opens and administers independently. In contrast, mortgage lenders and servicers usually set up and look after an escrow account when purchasing a home. This separate account is created to pay for non-mortgage-related costs like property taxes and homeowner’s insurance premiums.
Instead of taking care of these payments yearly, the amount is added to the monthly mortgage payment and then sent to the escrow account. The loan servicer then withdraws the money from this account to make the payments for you. This can be considered a holding area for your home insurance premiums. The same account can also pay the county assessor’s property tax bill. With an escrow account, taking care of this obligation is effortless.
Only some homeowners need to use an escrow account and can therefore take advantage of paying insurance using escrow, as they can pay the property taxes and home insurance personally. More often than not, though, mortgage servicers necessitate an escrow account for borrowers with a down payment that’s less than 20%.
An escrow account is also necessary for federally backed FHA and USDA loans. Additionally, suppose you are an existing homeowner who is refinancing their mortgage. In that case, you will likely have a minimum of 20% equity in the home for the lender to waive the escrow requirement. Having an escrow account is reassuring for mortgage servicers as it guarantees that the home insurance premiums will be paid.
How to Set Up an Escrow Account
Establishing a secure escrow account requires a few specific steps to be completed:
• Contact the escrow company and provide the necessary identification information.
• The buyer and seller must agree on a price and the payment amount. The buyer should then provide the payment to the escrow company.
• The escrow company will release the funds to the seller only after the terms of the agreement are fulfilled.
When a loan is created, a mortgage servicer typically sets up and takes care of an escrow account. The house buyer will set aside a big part of their closing costs to get the escrow account started. This helps form a cushion and ensure enough funds for the servicer to pay the insurer on behalf of the homebuyer.
Pros and Cons of Paying Insurance Using Escrow
When considering paying insurance using escrow, there are advantages and disadvantages to consider.
The Convenience Factor
If you are the type who likes to set something and forget about it, then paying insurance using escrow may be suitable for you. With an escrow account, you can remember the due dates of your homeowner’s insurance premiums and property taxes throughout the year. This means you will have to keep the money aside each month so you won’t use it for something else. An escrow account takes care of this responsibility, and your mortgage servicer will add the amount to your monthly loan payment and take care of everything else. Additionally, you won’t have to contact your insurance company or tax assessor to pay your bills, thus saving you time.
Your Mortgage Servicer May Incentivize Escrow Accounts
Mortgage lenders and servicers prefer paying insurance using escrow because they guarantee the payment of homeowners insurance and property taxes on time. To make them more desirable, some may offer a discount on closing costs or a reduction in the mortgage rate. This last one can save you a lot of money over the life of your loan. Even if you are not required to use an escrow account, this incentive is worth considering.
Disadvantages to Paying Insurance Using Escrow
Higher Closing Costs
The costs associated with closing the escrow account are likely to be much higher than the down payment and other lender fees. This could mean additional thousands of dollars that you owe at the time of closing. Remember to include this additional cost when you’re budgeting for your new home. If you put down less than 20% of the price of the house, you may not have a choice in the matter.
Missing Out on Investment Opportunities
When your mortgage servicer manages the escrow account, they may charge you more than the actual homeowner’s insurance and property tax bills. This is in case the insurance premiums or tax bill fluctuates. If there is insufficient money in the escrow account to cover the costs, the mortgage servicer will cover it and then charge you the difference later. On the other hand, you could end up with extra money in the escrow account that goes unused. In this case, some people suggest investing the funds elsewhere, such as a retirement or savings account, rather than leaving it in the escrow account.
Evaluating if a Trust Account is Suitable for Your Needs
People with less than 20 percent equity in their house may need to open an escrow account. However, individuals with a higher equity percentage have more freedom in this situation. It comes down to personal preference and how one manages their finances. If someone likes the concept of having their mortgage servicer pay for their homeowner’s insurance and property fees, then the ease of having an escrow account may be attractive to them. This is also true for people who think saving that money every month would be difficult.
The Final Verdict on Paying Insurance Using Escrow
Escrow accounts offer comfort and ease as they manage to make your homeowners insurance payments and property taxes. This also allows you to compare different insurers and save money by switching providers. However, it is essential to include your mortgage servicer in the process so they can direct your payments as required.
Have More Questions About Paying Insurance Using Escrow?
If you still have questions about paying insurance using escrow, call Bay Area Escrow by dialing (925) 831-9099 or email. Our friendly team is happy to answer any questions you have.