Whether you’re a first-time homebuyer or selling your third home and searching for your fourth, there are many different parts of your real estate transaction. Escrow accounts can be confusing if you haven’t used one before, and they are a simple way to ensure that all property taxes and insurance premiums are paid in a timely fashion. What should every homeowner know about homeowner's insurance and escrow?
What Is an Escrow Account?
When you close on your property, your lender will create an escrow account. This account is accessible by both you and the lender, and it is where the lender will deposit the portion of your monthly loan payment that is dedicated to covering other costs, like your homeowner’s insurance, property taxes, HOA fees, and private mortgage insurance. When you make your single monthly payment, it will include both the payment towards your loan and the payment for your escrow account.
In most cases, your lender will ask you to pay about 10 to 20% of the cost of your annual homeowner’s insurance premium at closing. This portion of the premium will be put into the escrow account. By having an escrow account, it is much easier to make sure that your taxes and insurance premiums are paid in a timely fashion. If your homeowner’s insurance coverage lapses, even for a short period of time, it can leave you completely vulnerable if an accident occurs. By having this taken care of, you can rest assured that you are protected at your house.
What Are Some of the Benefits of Having an Escrow Account?
· Escrow accounts ensure that you always have the right amount of money set aside to cover the cost of your property taxes, HOA fees, homeowner’s insurance, and more.
· Your mortgage lender will handle paying taxes and insurance payments for you, so you don’t have the added burden of remembering when they are due.
· You don’t need to worry about independently budgeting for lump-sum annual payments, as they will be taken care of for you automatically.
Can You Switch Insurance Companies?
Absolutely! Some homeowners worry that switching to a new insurance company is too complicated, but it is very straightforward to do. It’s important to have a good homeowner’s insurance policy, as it protects you against the potentially devastating financial impact of an accident or natural disaster.
Shopping around for a new homeowner’s insurance policy will not impact the escrow account or your current rates. Work with your new insurance company to handle the transition, as they help homeowners just like you all the time. The insurance company will directly send your lender a copy of your proof of insurance and the bill.
Are You Required to Pay Your Homeowner’s Insurance Through an Escrow Account?
Not necessarily. If you have a down payment that is 20% or higher, your lender may not require you to pay for your homeowner’s insurance using an escrow account. However, if you put down less than 20%, you will probably be required to utilize an escrow account to ensure on-time payments.
In many cases, homeowners who have over 20% for a down payment still opt to use an escrow account for convenience. You’ll write one check every month to your lender and allow them to handle paying these bills for you, so you never need to worry about coverage lapsing.
Do You Get a Discount on Homeowner’s Insurance Through Using an Escrow Account?
Some homeowners misinterpret what an escrow account is and what it is used for. The escrow account is a bank account used by your lender to help cover specific costs, like your HOA fees and homeowner’s insurance. Having an escrow account will not impact your premiums or how much you are paying for your various policies. Working with the right insurance agency is a great way to ensure that you always get the best rates for your homeowner’s insurance policy.