Do I Have to Pay Home Insurance Through Escrow?
(How and why your homeowner’s insurance is paid for using an escrow account)
Written by
Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
What Is an Escrow Account?
Escrow can be thought of as a referee whose job is to make sure buyers and sellers play by the rules agreed upon in a transaction. An escrow account is created and administered by a neutral third party. The buyer deposits funds into the account and the funds are released when the terms of the transaction are fulfilled.
For example, when a home is sold and purchased, a title company will often oversee the transaction, holding funds and arranging for the transfer of the property. The account that holds funds is called an escrow account. The process of completing the transaction (the mountain of paperwork we talked about earlier) is called “the closing.”
Lenders often use escrow accounts to make sure that insurance premiums and property tax payments required by the mortgage agreement are paid.
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Is Homeowners Insurance Paid for by Escrow?
Homeowners insurance premium is often paid from a lender’s escrow account. Part of the monthly payment made to the lender includes money to be deposited into the account. The process can be confusing, especially for first-time home buyers.
Stacy Lomonaco is a Senior Mortgage Loan Officer at Community Lending in Ft. Myers, Florida. She tells us, “We will require homeowners insurance covering the loan amount and if the property is located in a flood zone, then flood insurance will be required as well.
We look at the FEMA flood map to see if it will be required. In a lot of cases, we will escrow the annual insurance premium for the client and pay it when their bill is due. Each month, part of their payment (PITI-principal, interest, taxes, and insurance) is set aside for this purpose.”
Stacy also explains to her clients that “Homeowners insurance is a requirement for obtaining a loan. They are more than welcome to shop around for the best pricing and best coverage for their needs. They want to ensure that they are protecting their most valuable asset.”
What If My Insurance Premium Changes?
Lenders typically review the escrow account each year to make sure the funds are adequate. The insurance company notifies you and the lender well in advance of any premium changes. If necessary, you will be asked to deposit additional funds each month.
If you decide to change insurance companies, you will need to notify the lender. Your professional independent insurance agent can help you shop around and make the proper notifications.
Can I Pay My Homeowners Insurance outside of Escrow?
Some lenders may permit direct payment of homeowners insurance if the down payment is 20% or more. Remember, there will still be an obligation to maintain the insurance, and the lender will be notified if you fail to pay the premium, possibly resulting in penalties.
The lender may also charge more in interest and fees if you pay the premium directly. Paying homeowners insurance through the lender’s escrow account is a convenient way to make sure that you protect your valuable home.
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consumerfinance.gov