Is Homeowners Insurance Paid Through Escrow? What You Should Know
Are you wondering if homeowners insurance is paid through escrow? While the answer for most borrowers is yes, many factors impact how you pay for your homeowners insurance premium. In this article, we’ll provide an overview of how escrow may be used in certain situations to cover your annual homeowners insurance premium.
What Is an Escrow Account?
An escrow account is a home mortgage lender-managed account that you fund each month with your mortgage payment. These payments typically include payments:
- Your mortgage principal and interest
- Your home insurance
- Your property taxes
Lenders often incentivize homeowners to use an escrow account to ensure mortgage-required house insurance is fully funded. When homeowners send in a monthly payment, it includes a portion of a six-month or twelve-month home insurance premium. Lenders hold and transfer the funds on the homeowner's behalf. We recommend that you familiarize yourself with government escrow requirements under the Truth in Lending act.
How Does Homeowners Insurance Come Out of Escrow Accounts?
Is homeowners insurance paid through escrow? Your lender will hold the homeowner's insurance portion of your monthly mortgage payments over time. Then, when the semi-annual or annual payment is due, they will transfer the funds on your behalf. If your insurance premium changes from year to year, your escrow account manager will change your monthly mortgage bill accordingly.
When does homeowners insurance come out of escrow accounts? This depends on your lender and market conditions. They may even change the payments based on forecasted or predicted changes.
Pros and Cons of Using an Escrow Account for Homeowners Insurance
Pros
There are both pros and cons to using an escrow account as a homeowner.
Benefits include:
- The payment is wrapped into your mortgage payment, simplifying your to-do list.
- It breaks a large annual premium into smaller, more affordable monthly chunks.
- The lender is responsible for paying the insurance bill, so you don't have to worry about late payments.
Cons
However, there are some drawbacks:
- Your escrow account manager may miscalculate your monthly payment, leaving you with a big underpayment or a sudden increase in monthly mortgage payments next year.
- You don't get to hold onto the funds until the annual or semi-annual premium due date. While monthly payments help some people with money management, it can be frustrating if you don't need this level of support.
- Your lender may charge you service fees, maintenance fees, or late payment fees.
Understanding Escrow Insurance Myths
As you research escrow accounts, it's important to stay apprised of common escrow insurance myths. These include the following myths and outdated ideas:
- You always have to use an escrow account: Today, lenders can offer incentives or reduced fees for using their escrow services. But they are not necessarily required, depending on the terms of your mortgage.
- It's hands-off: You should have complete access to your escrow account, payment history, and upcoming due dates.
- You can't easily switch home insurance providers: You can switch home insurance providers at any time. You simply need to inform your lender—your new company may even handle this process for you.
How to Change Homeowners Insurance Providers with an Escrow Account
After you’ve determined if your homeowners insurance is paid through escrow, you may consider shopping around for another provider. Switching to a new home insurance provider is simple, even with an escrow account. Your new agent may handle it for you, or you can follow these steps:
- Research and select a new policy.
- Confirm with your lender that it satisfies your mortgage clause and requirements.
- Buy the policy and cancel your old one.
- Notify the lender so they can update your escrow account.
- The escrow funds should be sent to you (and you can send them to your new insurance provider) or directly to your new insurance.
As you make the switch, you can also decide if you even want your new homeowners insurance to be paid through escrow. Use these 5 tips to switching your home insurance to simplify the process.
Escrow Account Management and Oversight
When you have an escrow account, it can be tempting to let it stay "out of sight, out of mind." Once you’ve determined if your homeowners insurance is paid through escrow, you’ll want to periodically review your account. But there are a few key tasks you should take to stay on top of the account:
- Review your escrow account statements. Double-check the balances and the charges with your own records.
- Promptly call your escrow provider if you detect errors or problems. Follow up to get a refund for overpayment or to have your monthly payment adjusted if it doesn't look accurate.
Alternatives to Using an Escrow Account for Homeowners Insurance
You don't necessarily have to use an escrow account to pay your homeowner's insurance. You can instead pay your mortgage (principal and interest) to your lender, save funds for your home insurance payment, and save funds for your property taxes so you pay them directly, as well. There are some benefits, such as more control over the funds, potential price reductions based on your insurance providers' programs, and access to your own money throughout the year.
However, there are also some potential challenges. Some mortgage programs require you to pay insurance through an escrow account to ensure mortgage-mandated requirements are met. Paying directly also means you're responsible for saving and paying for your annual premium on your own.
Homeowners Insurance Escrow and Mortgage Payoff
Once you pay off your mortgage, you can decide whether to continue having an escrow account or not. An escrow service will collect monthly portions of your home insurance and property taxes and then transfer the accumulated funds to the right parties when they're due. This option may or may not give you access to discounts or simplify your payment obligations, depending on your unique financial situation.
Ask a Northern Neck Insurance Agent About Your Homeowners Insurance
Are you searching for trustworthy homeowners insurance companies in Virginia? Researching escrow accounts and shopping for home insurance are good financial habits for homeowners who want to stay in control of their bills. Reach out to Northern Neck Insurance Company if you have specific questions or want to learn more about being strategic with your home insurance payments. We’re here to help assist you with navigating your homeowners insurance in VA.
THE NORTHERN NECK INSURANCE INTEGRITY PROMISE — We pledge to provide straight talk and good counsel from our NNINS Virginia insurance experts through our blog. While we hope you find this to be a helpful source of information, it does not replace the guidance of a licensed insurance professional, nor does it modify the terms of your Northern Neck Insurance policy in any way. All insurance products are governed by the terms in the applicable insurance policy.
