What is an Escrow Account?
What Is An Escrow Account?
An escrow account is a type of savings account managed by your mortgage lender. It’s used to pay certain property-related expenses, such as property taxes and homeowners insurance, on your behalf. Essentially, you deposit money into this account every month, along with your mortgage payment, and your lender takes care of paying these bills when they come due.
Why Does An Escrow Account Work with Home Insurance
When you buy a home and finance it with a mortgage, the bank requires you to have homeowners insurance. This insurance protects both you and the lender in case your home is damaged or destroyed. To help ensure the home stays insured, lenders often require it to be managed through an escrow account. Why? The bank has a financial interest in this home, just as much as you, the homeowner, has in the home. The bank is holding the loan. If the home is damaged beyond repair and there is no insurance on the property, the bank loses out on this investment. The home is the collateral on the loan.
Here’s how it works step-by-step:
Monthly Contributions: As part of your monthly mortgage payment, your lender will add a portion for your home insurance premium (as well as property taxes). This amount goes into your escrow account.
Lender Payments: When your home insurance premium is due, your lender will use the funds from the escrow account to pay the home insurance company directly.
Annual Adjustments: Your home insurance premium may change from year to year due to factors like changes in coverage or increases in property value, or more commonly as we have seen in the last number of years, homeowners insurance rate increases. When this happens, your lender will adjust the amount you pay into escrow each month to ensure there’s enough to cover the new premium. If there is a shortage in your escrow account, meaning if the amount that you have in the account is not enough to pay the home insurance, the mortgage company will may the home insurance renewal payment. They will then send you a bill for the difference. You can either pay that lump sum or they will divide that shortage over the next 12 months.
In summary, an escrow account simplifies the process of managing home insurance and property taxes. By automatically setting aside a portion of your mortgage payment, it helps ensure that these essential bills are paid on time, protecting both you and your lender from potential risks.
If you have questions about your home insurance policy or how your escrow account works, feel free to reach out to us at Ameriguard Insurance. We’re here to help!