Should You Escrow Homeowners Insurance?
Escrow is a type of account managed by a third party. To make sure all parties deliver during a contract, each member trusts their interests in the contract to escrow. The title and the money go into escrow and then get distributed to each appropriate party once everyone fulfills the conditions of the contract.
Homeowners typically enter into an escrow account for payment of their mortgage, taxes, and homeowners insurance. You pay a certain amount to your lender over the year and your lender handles the rest.
Do I Have to Escrow My Homeowners Insurance?
In most cases, you must create an escrow account to cover these expenses. This protects your lenders because they’re the ones at the most risk. If you don’t pay your taxes, the government comes in to collect. And if you don’t protect your home with the right coverage and something happens, they lose the asset.
When you buy a house, you’ll most likely create an escrow account with one of the 4 Main Title Companies:
|Fidelity National Financial||33.86%|
|First American Corporation||26.34%|
|Old Republic National Title Insurance Company||13.53%|
|Stewart Title Guaranty Company||12.95%|
|Other Regional Companies||13.32%|
If you don’t want to create an escrow account, you’ll need to have a down payment of at least 20 percent. In addition, lenders usually charge a fee to waive escrow.
Other lenders may make it even harder for you by requiring a year of on-time payments before letting you waive escrow. And waiving escrow is never allowed on any FHA home.
What Are the Cons of Escrowing Homeowners Insurance?
On the other end, you’ll have to trust your lender to pay your premiums on time. There are a few reasons that would prevent this from happening, human error and bankruptcy for starters. Missed premiums leave you vulnerable in case anything happens to your home during that time. Granted, most lenders are required to cover you when they mess up. But it’s still stressful.
You’ll lose the interest you could be making on the money. In most cases, your lender collects the interest. It may not be much, but it’s still your money. Keep in mind that some states require lenders to pay back some of that interest, however.
You’ll also lose access to liquidity. With an escrow account, your money is locked up in a “forced savings” account. It’s your money, but you can’t use it. And if you’re the type of person who prefers to have access to your funds, then this creates a problem.
There’s the issue of overages and shortages to be worried about as well. If you pay too much, you’ll simply be reimbursed at the end of the year. You’ll have lost access to those funds over the year, but it’s better than the alternative. A shortage is a real problem. Pay too little, and your house becomes vulnerable.
What Are the Pros for Escrowing Homeowners Insurance?
Escrowing your homeowners insurance can give you peace of mind. You pay a set amount each month, and the lender handles the rest. If you’re not great at managing your finances or don’t want the extra stress, an escrow account makes it easy. You simply pay a monthly minimum.
It’s much easier. Because your escrow agent handles all of your payments, the only thing you need to do is send a single payment each month. Your lender will take of paying the respected parties on time, leaving you with more time for more important matters.
As a result, many lenders even sweeten the deal by discounting the interest paid on the loan when you set up an escrow with them.
You may even get some interest returned.
15 states require the lender to pay back some of the interest they receive while the money sits in escrow:
- New Hampshire
- New York
- Rhode Island
Trusting in escrow can help you avoid sticker tag shock. The average price for a home in America is around $200,000. If you had a 30-year mortgage on that home at a 5 percent interest rate, then you’d pay roughly $1,073.64 in mortgage payments each month. And if you owned that house in Maryland, then you’d have to pay roughly $2,366 each year in property taxes. Add to this the cost of homeowners insurance (the average premium Americans pay each year $1,131). That’s over $16,000 in bills each year for homeownership.
Instead of paying huge premiums at once, your bills get spread out over the year, making them more manageable. And that means you won’t stumble into a four-figure bill at some point during the year.
Should You Escrow Your Homeowners Insurance?
Ultimately, you need to make sure your payments always happen on time. When deciding whether or not to escrow your homeowners insurance, you should choose the financial strategy that ensures you stay covered.
Provided you have the option to waive escrow, and you want more control over your finances, or you want to avoid trusting another party, then waive escrow. If you have a “set it and forget it mindset”, then escrowing your homeowners insurance will work best for you.
Hope that helps!
At your service,