If you have been through the home buying process, you have heard the term escrow. Even if you have dealt with escrow before, you may still not know exactly what it is or how it works. Here’s the run down.
Escrow is basically a way the bank or mortgage company can track your home owners insurance and taxes, sometimes flood insurance, as well. The bank or mortgage company want to make sure you get those paid every year, so they set up an escrow account to pay them for you. If you are escrowing your home owners insurance and property taxes, part of your monthly mortgage payment will be applied to the escrow account. It builds up as you make your monthly mortgage payments, so when the bank or mortgage company get the bill for the home owners insurance and taxes, they can make that payment for you. It’s actually very convenient because its like a savings account you use to pay those two bills each year. There are basically only a few times you have to deal with the escrow account. When you first buy the home, annually if an adjustment has to be made, or if you are changing your insurance.
Buying A Home
When you are buying a home, you’ve been approved, now you’re ready to go to closing. The mortgage company will estimate how much they think your property taxes will be based on the prior years tax bill, but the home owners insurance is up to the home buyer to check on. This is one of the last things most people think about when they’re buying a home because of all the other hoops you have to jump through to get that mortgage closed. Once you get the closing date, the mortgage banker will probably say, they need you to get your homeowners insurance to finalize the closing. Now you’re calling or shopping around trying to get a quote. What I’ve found is that a lot of people are so tied up in the closing process, the first person that gives them a reasonable insurance quote, they’ll take. Don’t wait until the last minute to get your home insurance quote because you may be able to find a better deal if you start shopping as soon as you’re approved for the mortgage loan and the offer has been accepted. Once you get the insurance figured out, the mortgage company asks for a binder or proof of insurance for the closing. The insurance will be calculated into the closing of the loan. You usually don’t have to pay for the homeowner’s insurance up front. If you are required to have flood, be prepared to pay for that up front. Most mortgage companies will require you to pay for it, then escrow later.
Each year, the bank or mortgage company will send you a letter letting you know if they need to adjust your mortgage payment to make up for any short fall or surplus in the escrow account. Basically, if your home owners insurance increases or property taxes increase, then your mortgage payment will increase to apply more funds to escrow to pay for the increases. If you call the bank or mortgage company, they’ll tell you an automated response that the reason your payment went up was either because of the insurance or taxes. This typically prompts people to check the rate on their home insurance, which leads to the third instance you may have to deal with your escrow.
Changing Your Insurance
The other time people have to deal with their escrow account is if they change their homeowner’s insurance. A lot of people think they can only change their homeowner’s insurance on renewal, but that’s most definitely not true. It is easier to change the insurance carrier at renewal, but its not difficult if you change it after the renewal date. If you change at renewal, you need to shop for the insurance coverage about 45-60 days before renewal. The insurance company will send a bill to the mortgage company about 30 days before its due and the mortgage company will typically pay that bill as soon as they receive it. If you want to change your insurance at renewal, then you need to have the new policy ready to be billed to the mortgage company before the 30 days. When you are mortgage billing, most insurance carriers will allow you to date out 60 days in advance.
Now, if you’re changing your home insurance after the mortgage company has paid the bill, it involves a few more steps. What happens is once you have a new insurance policy you are wanting to take effect, you or your agent has to send that new bill to your mortgage company’s escrow department to pay. They will immediately pay that bill for you. When you cancel the policy you are replacing, that insurance carrier will refund the check to you directly, not the mortgage company. What you have to give that money back to your escrow that was paid for the new policy. It’s really not that big of a deal to do, but it does have a few steps to get everything completed. It could be well worth your time, especially if you can save several hundred dollars on your home insurance, which would lower your monthly payment.
TIP: If you want to save yourself a lot of work, talk to an independent insurance agent who has multiple home insurance carriers they can quote you through. This saves you a lot of time and effort.
Disclosure: APPA Insurance is an independent insurance agent licensed in Kentucky and represents multiple carriers that offer homeowners insurance.