What Is Homeowners Insurance Escrow & How Does It Work?

Homeowners insurance escrow accounts are used by banks and lenders to ensure that homeowners who borrow money to pay for their homes have the proper insurance and are able to pay for it. If you've heard the term "escrow homeowners insurance," understand that while this phrase is commonly used, an escrow account isn't actually a type of insurance policy. Instead, an escrow comes in the form of a written document, property, or money and is held or delivered by a third party until a contract or agreement is fulfilled. 

Escrows are often used in acquisitions, mergers, real estate transactions, and court case settlements. Here's a deeper breakdown of what escrow accounts are and how they're used in relation to homeowners insurance.

What Is a Homeowners Insurance Escrow Account?

Many types of escrow accounts are used to help buyers and corporations safeguard their assets, typically during large financial transactions. The two most common types of escrow accounts used in real estate are real estate escrows and mortgage escrows. 

So, what does escrow cover? A real estate escrow or pre-sale escrow protects both the buyer and seller of a property if the deal isn't completed. An escrow account is controlled by a third party, and buyers can deposit money into them as a sign of good faith to the seller. 

Some sellers may request that buyers complete this step. After a property is closed on, the money from the escrow account then goes towards the home's down payment. A buyer may have their funds returned to them if the property fails an inspection or otherwise isn't up to their expectations, depending on the terms of the escrow.

You may also have wondered, "What is escrow on a mortgage?" Mortgage escrows are another type of holding account, but are set up by lenders. This type of escrow account divides a homeowner's monthly payments into three categories: principal, interest, and escrow. 

Funds housed within mortgage escrows are used for many purposes. Home insurance escrows are just one of them. However, funds in mortgage escrows can also be used for HOA fees, property taxes, flood insurance, and mortgage insurance.

How Does Homeowners Insurance Escrow Work?

Now, you may be wondering, "How does escrow work?" A large part of the purpose of an escrow account is to ensure that you'll pay your homeowners insurance premiums and real estate taxes on time after you close on a home. 

The lender sets up an escrow account that will be used for monthly payments that cover not only your home insurance but also mortgage insurance and real estate taxes, as well as any HOA fees. So, in that sense, escrow does pay home insurance premiums.

When you close on your home, your lender will likely require you to pay about 10% or 20% of your homeowners insurance policy's annual premium, which will get deposited directly into your escrow. Going forward, your escrow account will be used to make monthly payments on time. 

The mortgage lender pays your home insurance bills, HOA fees, real estate taxes, mortgage insurance premiums, etc., from your escrow account each month and deposits the required amount into the account to do so.

Benefits and Drawbacks of Paying Homeowners Insurance With Escrow

As with any method of payment, there are pros and cons to paying for your homeowners insurance premiums with an escrow account. Some homeowners see home insurance escrows as offering convenience and a hassle-free way to ensure their payments are made, while others would prefer to have the responsibility of making their own payments each month. 

Here's a breakdown of some of the most common benefits and drawbacks to homeowners insurance escrow accounts.

How Does an Escrow Account Pay for Homeowners Insurance?

How exactly is homeowners insurance paid through escrow? For starters, you're required by your mortgage lender to keep homeowners insurance as long as you own your home. The mortgage lender gets all the updates about your policy, including renewal notifications and policy changes. 

So, when does your escrow pay home insurance? When your home insurance premiums are due, the mortgage lender receives the bill and sends the payment to your insurance carrier directly from your homeowners insurance escrow account.

Escrow disclosure statements are sent to the homeowner each year, detailing all payments made from the account as well as any shortages or surpluses. Homeowners insurance is included in escrow, as are property tax and HOA fees or community district fees, depending on where you live. Escrows also include funds for flood insurance and mortgage insurance if applicable.

Do You Have to Pay Homeowners Insurance through Escrow?

If you've been asking, "Do I have to pay homeowners insurance through escrow?" you're not alone. In fact, many homeowners wonder, "Is it better to pay homeowners insurance through escrow or on my own?" 

As you now understand, homeowners insurance is included in escrow. You might have to pay home insurance through an escrow account if your home's down payment is less than 20%. 

Mortgage lenders often require this as a way to guarantee your insurance premiums will be made timely each month so you won't go without insurance due to non-payment for any length of time. This, in turn, helps to protect the mortgage lender's investment in your property. 

Does Your Escrow Payment Decrease If Your Home Insurance Premium Goes Down?

You might be questioning if your homeowners insurance escrow payments will go down if your home insurance premiums do. While you should always notify your mortgage lender if your home insurance policy's costs change, you won't necessarily have to start paying less toward your home insurance escrow account. 

Your escrow homeowners insurance account might still require the same monthly payment amount even if your home insurance premiums decrease because the cost of your HOA fees, property taxes, or other insurance may increase at the same time.

Consider a monthly mortgage payment of $1,000 and a monthly insurance premium of $200 that gets deposited into an escrow account. The total monthly payment would be $1,200. 

Now consider that your home insurance premium decreased by $50 per month to $150, but your mortgage payment increased by $75. You would actually start to owe a payment of $1,225 per month to your escrow account, regardless of your home insurance premium decreasing.

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Can You Switch Carriers If Your Homeowners Insurance Is Paid with Escrow?

It's possible to switch home insurance carriers even if your monthly premiums come out of an escrow account. If your homeowners insurance escrow contributes annual premiums to your insurer, you might get a partial refund from your former home insurance carrier after you switch. 

It's recommended to have your mortgage lender redeposit that refunded amount back into your home insurance escrow account. If you don't redeposit the funds into your escrow homeowners insurance account, you might face a larger escrow deficit and have to pay a large one-time payment or increase your monthly mortgage payment installments to cover the difference. 

Ultimately, working together with an independent insurance agent is a great way to ensure your switch to a new home insurance carrier is seamless and hassle-free.

Be in the Know When It Comes to Escrow

All in all, home insurance escrows provide a convenient way for many homeowners to trust that their monthly payments will always be made on time. However, escrow accounts aren't for everyone, but all homeowners must be equipped with the right kind of homeowners insurance. 

Working with a local independent insurance agent who understands the ins and outs of homeowners insurance is the easiest way to ensure your home gets the protection it needs and that you get the best possible price. 

Your agent will shop and compare policies from multiple carriers for you to find the best overall picture of coverage and cost. They can also help file claims for you and update your policy as necessary.

FAQs about Home Insurance and Escrow