If you’re thinking of buying a home by taking out a mortgage, you may have some idea about an escrow insurance account. As a homeowner, understanding how an escrow account works can simplify financial planning.
Your escrow insurance covers part of your homeowner’s insurance, mortgage insurance, and property taxes. In case any of these payments fall due, your mortgage lender can use the amount from your escrow account to pay them on your behalf.
How Does an Escrow Account Pay for Homeowners Insurance?
You manage separate accounts with your lender. Through an escrow account, you can set some money aside each month for bills pertaining to your property. They come as a lump sum, such as homeowners insurance and property taxes along with additional bills. With your escrow insurance account, you can make a single monthly payment to pay off the loan as well as the escrow amount.
Benefits of Escrow Insurance
There are several benefits of having an escrow insurance account, including:
- It helps you put a certain amount of money aside every month to pay for lump-sum and annual expenses like taxes and insurance.
- Not having an escrow account can actually make the payment for your taxes and mortgage etc., harder as you’ll be required to make those payments all by yourself.
- It provides peace of mind as you can budget some of your annual costs as a homeowner.
However, even if you have an escrow insurance account, you must check statements from your mortgage insurer and tax authorities to ensure your bills are being paid on time.
How Can You Set Up an Escrow Account?
Escrow accounts can be set up through your mortgage lender to cover taxes and insurance premiums. The biggest perk associated with such accounts is that every lender can make their own rules. Moreover, mortgage lenders are required to send you annual statements that include details about the payments you’ve made and the money in the account. In case there is a shortage in your account, the lender may try to cover the difference by increasing your interest rate.
How to Know When You Don’t Need Escrow
It may be a good idea to skip escrow if the deal you’re getting on your mortgage rate is satisfactory. However, if you’re not giving at least a 20 percent down payment on a home, then an escrow insurance account is necessary. Some time down the line, you may be able to let go of an escrow account. However, you will be required to show proof of on-time payments each month.
The Bottom Line
Having an escrow insurance account will help you get you rid of payment-related hassles you might be facing. However, you must have adequate knowledge of it before creating an account. Therefore, if you’re interested in getting one made, contact JD Title & Escrow for a consultation today. With over 13 years of experience, they can make your transactions smooth and worry-free.