shiny legal malletShould You Escrow Homeowners Insurance?

Escrow is a type of account managed by a third party. To ensure all parties deliver during a contract, each member contributes to an escrow account before the transaction clears. 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, property 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?

Your lender will encourage you to create an escrow account to manage these expenses. The escrow account protects your lenders because if you forget to pay your bills, they are at risk of losing their collateral - your house. If you don't pay your taxes, the government can repossess your property. If you don't protect your home with the right insurance coverage and fire burns it down, the lender loses the asset backing the loan.

When you buy a house, you'll most likely create an escrow account with one of the 4 Main Title Companies:

Title Company Share of Title Insurance Market
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. Lenders usually charge a fee to waive the escrow account requirement. Other lenders may make it even harder for you by requiring a year of on-time payments before letting you remove escrow. And waiving escrow is never allowed on an FHA home.

What Are the Cons of Escrowing Homeowners Insurance?

You'll have to trust your mortgage servicer to pay your premiums on time. There are a few reasons that would prevent this from happening: human error and bankruptcy. Missed premiums leave you vulnerable in case anything happens to your home during that time. Most lenders are required to cover you when they make a mistake, but it's still a risk.

You'll lose the interest you could earn on the money in escrow. 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.

You'll also lose access to liquidity. With an escrow account, your money effectively sits in a locked savings account. It's your money, but you can't draw from it for other purchases. If you're the type of person who prefers to have access to your funds, this creates a problem.

The issue of overages and shortages -- if you pay too much, you'll receive a reimbursement 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 to foreclosure.

For home insurance, your lender can require you to pay a year's worth of home insurance upfront. You pay your first policy term of 12 months in full, and then starting the first month of your mortgage payment, you pay a monthly amount for your home insurance. By 12 months from now, your title company can pay your home insurance renewal for the next 12 months in full from the monthly balance you have been building.

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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. Because your escrow agent or mortgage servicer handles all of your property related payments, all 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 other essential 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 their mortgage servicer team. You may also get some interest returned.

15 states require the lender to pay back some of the interest they receive while the money sits in escrow:

  • Alaska
  • California
  • Connecticut
  • Iowa
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New Hampshire
  • New York
  • Oregon
  • Rhode Island
  • Utah
  • Vermont
  • Wisconsin

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 approximately $2,366 each year in property taxes. Add to this the cost of homeowners insurance -- the average American spends $1,211 each year. That's over $16,000 in bills for homeownership per year. Instead of paying substantial lump sums 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 surprise 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 current and stay covered. If you have a set it and forget it mindset, then escrowing your homeowners insurance will work best for you.

I hope that helps!

At your service,
Young Alfred