Understanding what mortgage escrow accounts have to do with homeowners insurance
If you’ve ever done a deep-dive investigation into mortgages, chances are you’ve read the word “escrow.” (And if you’ve already got a mortgage, well — you may be making escrow payments right now. Lucky you!) It’s a confusing topic, so we’re doing our best to break it down into a digestible Q&A.
What exactly is escrow?
Broadly, an escrow account is a separate and neutral third-party account that holds funds until both parties have completed their contractual obligations. Most often, people talk about escrow in relation to real estate, with the two parties being the seller and the buyer.
These escrow accounts are short-lived, lasting just for the duration of the property purchase. But escrow accounts can also be set up to oversee mortgage payments, wherein the two parties are the buyer and the mortgage lender.
Do you need an escrow account?
While the nuts and bolts of mortgage escrow accounts tend to be similar (though you should always read the fine print!), the type of loan you take out for your mortgage can affect whether you’ll need an escrow account in the first place. Requirements also differ state by state, and sometimes even within the state (we’re looking at you, California!) — so it’s always good to speak with your escrow agent to make sure you know exactly what you're legally contracted to do.
What goes into an escrow mortgage account?
If you have an escrow mortgage account, you’ll usually make a single monthly payment that covers a portion of your property taxes, homeowners insurance (that’s the important one for our purposes), and mortgage insurance. (In case you were wondering (and why wouldn’t you be), mortgage insurance exists to protect the lender in case you fall behind on your payments.)
So coming back to homeowners insurance: when you have to make an insurance payment, the mortgage lender uses the funds in the escrow mortgage account to pay on your behalf. It’s basically like letting someone else take on automatic payments (aka it’s one less thing for you to worry about every month).
But it’s important to note: You’ll be responsible for selecting an insurance carrier and setting up your homeowners insurance with them. Once you have everything in place, you pass off payments to your mortgage lender, who pays out via the escrow account.
Can an escrow account be cancelled, and if so, what happens to your homeowners insurance payments?
While escrow accounts can be cancelled, it depends on the terms of the account and the condition of your mortgage. To be cancelled, escrow mortgage accounts often require that you own a certain percentage of your home and that the mortgage is at least one year old.
That said, there are reasons you might want to cancel. For one thing, moving your homeowners insurance out of the escrow account probably won’t be difficult. And because of fees associated with an escrow mortgage account, your monthly charges may be lower without one. This financial cushion in the account keeps the bank happy, since it ensures that there’s always enough money to cover payments. But hey, it may make you even happier to hold onto that money yourself!
Still, it might not be in your best interest to operate independently. If saving money for big bills isn’t your forte, having a mortgage escrow account could be helpful, since you make small contributions to it each month. Plus, you won’t have to worry about remembering to pay property taxes or insurance, which can all come out of this escrow account. On the flip side, if you’re great at saving, maybe you want a run-of-the-mill savings account, where you can earn interest.
If you’re concerned about your payments, remember that understanding how escrow accounts work is the best way to make sure you’re not leaving money on the table. And if you’re looking to keep all your insurance documents organized (and easily shop for new insurance when you’re ready), we recommend setting up your free Marble account today.