In this article: Learn about escrow accounts and how they can be used to simplify your property tax and homeowners insurance payments. Managing your escrow account has never been simpler with online banking and regular statements.
Is your home insurance paid through escrow? Whether you pay home insurance premiums yearly or monthly, knowing that the management of these payments doesn’t have to fall on your shoulders can be a nice reprieve. An escrow account set up between you, your payee, and a neutral agent can make paying insurance premiums on time a cinch.
Read on to learn more about escrow accounts and how they can be used to make paying homeowners insurance through escrow easier.
What is an escrow account?
An escrow account is a financial contract in which a neutral agent receives and disburses funds between two primary parties – the buyer and the seller. Typically, an agent acting on behalf of the seller opens an escrow account through a title company once a purchase sum is agreed upon for the property.
There are two types of escrow accounts. The first type is held throughout the home-buying process, from the start until you close on your home purchase. This account is used to safeguard your down payment, which is eventually counted against the total purchase price once the sale is closed.
The second type of escrow account is also known as an impound account and is used by your mortgage provider to manage property tax and insurance premiums. It’s important to remember that the amounts needed to cover the taxes and premiums may be included in your monthly mortgage payments. They aren’t actually part of your mortgage, so they won’t count against your principal balance.
Paying home insurance through escrow
Home insurance can be paid through escrow. You can set up an escrow account just to pay for your home insurance without it having anything to do with your mortgage – though arranging it through your mortgage lender via an impound escrow account does simplify matters. That said, it’s typical for property taxes and insurance premiums to be paid out through the same escrow account.
Here’s how you can start paying homeowners insurance through escrow along with your property taxes:
- Check the total annual cost of your home insurance and taxes. You’ll be better equipped to set up payments by verifying the total yearly amount.
- Check your monthly payment amounts. Calculate monthly payments by adding the total annual amounts for your property taxes and premiums and dividing by 12. You may consider adding a bit extra, as taxes and premiums fluctuate.
- Open an escrow account. Shop around with various banks and lending agencies to see your options, then pick the option that works best for you.
- Set up automatic deposits and withdrawals. Rather than depending on memory to make sure funds are added and disbursed on time, set up automatic deposits and withdrawals to simplify the process. This option saves you time and peace of mind, but it does come with a small fee.
- Make adjustments. Since taxes and insurance premiums tend to fluctuate, you may have to adjust during the year to ensure enough funds are in the account.
Homeowners insurance paid through escrow pros and cons
Paying homeowners insurance through escrow comes with pros and cons.
Pros
- Fewer bills and due dates. An escrow account allows you to make lump-sum monthly payments to the agent who holds the account. They become responsible for disbursing funds to the appropriate payee at the appropriate time.
- Earn interest. In some states, an escrow account is like a standard savings account in that it can accrue interest. In a sense, you can make money by setting up an escrow account.
- No sticker shock. Most places collect property taxes twice a year. By using an escrow account with a prorated monthly payment, you avoid the shock of having to pay out all at once.
- Convenience. You can opt to pay homeowners insurance, property taxes, your mortgage, and even HOA dues through an escrow account, saving you the hassle of having to pay all these bills separately.
Cons
- More bills and due dates. This “con” only happens if you opt out of an escrow account since your tidy one-and-done payment suddenly becomes many payments.
- Force-placed insurance. If your homeowners insurance coverage lapses due to late payments, your mortgage lender may buy homeowners insurance on your behalf. This forced insurance is usually more expensive than a standard policy.
- Payments can fluctuate. If you’re using an escrow account to take care of your bills, be aware that insurance premiums, taxes, and mortgage rates can fluctuate, resulting in you having to either adjust your monthly payments or work in an extra financial cushion.
If you’ve opted for an escrow account, you’ll need to know what to do if something goes wrong. Here are some signs that something may not be right with your account:
- Your monthly payment changes without due notification.
- Your lender set up force-placed insurance.
- You receive a notice from the local government that your property taxes haven’t been paid.
If there’s any indication that something has happened with your account, you should first contact your lender. You may need to fill out a request for information or an error report, but doing so may determine whether the error is on their end or yours. If the problem is not resolved this way, consider complaining to the Consumer Financial Protection Bureau.
Understanding the escrow account process
An impound account – the type of escrow account used to manage homeowners insurance and property taxes – has a different process from the standard real estate escrow account. In a standard escrow account, the process starts when a home seller accepts your offer. A neutral party – generally, your mortgage lender – holds both your downpayment and the property for a period of between 30 and 60 days, depending on several factors. These factors include:
- Problems spotted during the inspection
- Agreed-upon repairs
- Unknown liens
- Bank delays
When all of the necessary conditions for the sale are met, the lender sets up an escrow account for paying taxes and insurance. This account remains valid until the new homeowner pays off their mortgage or refinances it through a different lender.
Many banks also offer escrow accounts that can be set up to pay taxes and insurance premiums, separate from a mortgage. In this case, the process starts when you approach a bank to set up the account, provide the relevant account information, and set up prorated monthly payments. It’s important to note that your lender may require two months’ worth of payments in advance to function as a cushion against possible lapse.
Payments to an impound account are typically made every month, so it takes out the guesswork and lessens the shock of having to pay out large sums of money.
Like any financial account, you’ll receive a statement for your escrow account. Most escrow statements have several sections, including:
- Your account number
- The date of preparation
- Your principal balance (the amount remaining on your mortgage)
- Your escrow balance (the amount held for your monthly payments)
- Your property address
- Your insurance
- Your property taxes
- The prorated monthly payments
Many banks and mortgage lenders offer online banking, allowing you to track the progress of your account without having to speak to your lender or wait for the statement. This way, the responsibility of making the payments is off your shoulders, but you’re still easily informed about how your funds are being used.
How to manage your escrow account
Through your online account dashboard, you can usually update your account without speaking to your lender. In this instance, you can log onto your profile and make whatever changes you need to. If you’re unsure how to use an online account dashboard, speak to your lender and have them make the changes for you.
If you want to update your home insurance while in escrow or change your provider, you can do it through a few simple steps. Assuming you’ve chosen your new carrier, here’s how to proceed:
- Confirm the mortgage clause. The mortgage clause is how your lender is listed on the home insurance policy, including their business name and proper address.
- Purchase the new policy. Since you’re paying out of escrow, you won’t have to make an out-of-pocket purchase.
- Cancel your previous policy. Ensure the cancellation is effective from the same date your new policy is slated to take effect. This assures there are no gaps or overlaps in coverage.
- Tell your lender. Your lender will receive a notice of policy cancellation and a declaration from the new insurance provider, but you can prevent confusion by simply notifying them of the change.
- Send refunds to your escrow account. You may receive a premium refund from your previous insurance provider, depending on when you cancel in your policy cycle. If you switch providers midterm, you’ll likely get a refund. Keeping this money may result in a shortage in your escrow account, which can result in higher monthly payments.
Escrow accounts can simplify the hassle of making multiple payments by lumping them together into one payment. Preparing to start paying homeowners insurance through escrow can be rather involved, but the potential for peace of mind is undeniable. Taking the steps outlined in this article can reduce the stress of managing extra bill payments.
