Home Insurance in Mortgage Escrow Account - FAQs
Mortgage escrow accounts can be confusing. We hope these QAs help you.
If I Pay My Yearly Home Insurance Premium Upfront into My Mortgage Escrow, Must I Still Pay the Monthly Premium Fee?
Yes. Your mortgage escrow account must always have enough funds to pay 12 months' worth of monthly bills from your escrow account.
Let's say your annual homeowners insurance premium is $2,400. If you pay it monthly, you will owe $200 per month, or you can pay it as a once-yearly lump sum payment at the beginning of your annual billing cycle. In this case, you decide to pay the $2,400 premium upfront. Since you paid upfront for the upcoming year, you probably think you now have no monthly payments until your premium comes due next year.
Nope - your monthly payments must continue with a mortgage escrow. They accrue as a cushion for the following year's insurance premiums. If you pay a monthly premium each month you will have built up enough balance to pay next years insurance policy in full exactly one year from now.
Let us look at an example.
It is Dec 2020, and your $1,800 annual homeowners insurance premium for 2021 is due on Jan 1, 2021. You pay your home insurance through your mortgage escrow account. You decide to pay the full $1,800 on Jan 1, 2021, knowing that payment will cover your home insurance from Jan 2021 through Dec 2021.
Because your bank always requires you to have a full years’ premium in your escrow account, you still must pay the $150 monthly premium so that there is enough reserve in your escrow account to cover 2022 when the policy renews next January.
Isn't There Another Escrow During the Home Buying Process?
Yes. There are two parts of buying a home where the term escrow comes up. The first part is an escrow payment, also known as earnest money. It is a kind of down payment that would be returned to the potential buyer if the seller sells the home to someone else. The other type is escrow home insurance and property taxes.
What is My Initial Escrow Payment at Closing?
Typically, your bank will require you to pay a year's worth of homeowners insurance at the closing. The same goes for property taxes, PMI, HOA, and other monthly bills your escrow will pay. The number of months paid upfront depends on your bank's rules.
The first year's amount gets deposited into an escrow account, and upon closing, your bank will pay your home insurance bill.
If I Overpay, Do I Get an Escrow Refund?
Yes. Typically, an escrow refund check will be issued if you overpay if your overpayment is over $50. You may also have an option to subtract the overpayment amount from your next payment. An overpayment may happen if your insurance rate drops during the year.
What Happens If I Have an Escrow Shortage?
If your initial escrow payments are too low, you will have to come up with extra money at the end of the year. Because some of the components of your escrow account change in value, it is possible you may underpay in a particular year. Typically, this may happen when a ballot measure adds new fees to your property insurance, or you add coverage to your homeowner insurance.
Do You Have More Mortage Escrow Questions?
If you have questions about an escrow account or would like an insurance quote today, please click below. We can answer your escrow questions and help you get the right product to protect your home, your most significant investment. Having the proper coverage will give you peace of mind about your home investment.
I hope that helps!
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