How Does Homeowners Insurance Escrow Work?

Mortgage companies generally prefer homeowners placing money into an escrow or impound account which they later will use to pay your property taxes and homeowners insurance.  Many mortgage companies require customers to begin an escrow account either at the inception of the loan or at a point where some assistance may be required by the customer.

Since for the average property owner, it is difficult to save enough money in advance to cover the payment of property taxes and homeowners insurance, it may make sense to set aside 1/12 of the total annual outlay monthly  which is added to the monthly mortgage payment and deposited directly into an associated savings account (escrow account) specifically for the purpose of not burdening the customer with the payment of taxes and insurance.

This process makes it easier for the homeowner and offers an assurance to the mortgage lender that the customer will not have a financial burden that he or she may be unable to pay thus causing complications to the contractual mortgage agreement.

The mortgage company will list your escrow balance on each monthly statement as well as offer you an annual statement showing the deposits and disbursement of payments from your account.  During the past few years, it is commonplace for the mortgage companies to require an additional 10% of the total of taxes and insurance to be deposited annually in order to safeguard increases in payments for the following year.  Most banks will pay a minimal interest rate on your deposited money; however, this is by no means a savings vehicle but more correctly a convenience mechanism to keep the customer out of trouble.

When buying a house, it is important to understand that your first year’s insurance premium will be paid directly as closing fees during the purchase;  the monthly escrow amount added to the mortgage payments is merely a savings deposit to be used for the payment of insurance the following year.