If you're considering a new mortgage or shopping around for insurance, you might wonder whether you can pay your homeowner's insurance premiums directly without using a mortgage escrow account. The answer often depends upon your situation, but even when you can pay your own premiums, it might not be the best idea.
When you take out a mortgage that includes an escrow account, your lender agrees to make your home insurance and property tax payments for you, using your own funds. An escrow mortgage payment includes three factors: the principal payment, the interest charges, and the escrow payment. Your escrow payment, based on your yearly homeowner's insurance and property tax, amortized over 12 months, is deposited into a special escrow account. The lender pays your insurance and taxes from this account.
In many cases, the decision of whether to use an escrow account to pay homeowner's insurance premiums and taxes is out of the borrower's hands. Finding a lender who offers mortgages without escrow can be difficult; some lenders no longer offer that choice. Borrowers who make a down payment of less than 20 percent of the home's purchase price are often required to take an escrow account.
The Wisdom of Paying DIrectly
Even if you fall into a mortgage category that does not require escrow and you find a lender who also does not require it, forgoing the escrow account and paying your own home insurance premiums -- plus your taxes -- might not be wise. Many lenders who do not require escrow accounts charge a higher interest rate for that arrangement. If higher interest rates are not a concern, finances might be. Although you pay escrow fees on a monthly basis, you might be required to pay your premium yourself upfront, requiring an outlay of several hundred dollars or more. An insurer who allows you to pay by the month might charge a higher premium or service fee for that set-up.
Discounts and Bundles
Many borrowers who wish to pay their home insurance policy premiums directly rather than through escrow mistakenly assume that paying through the lender would cost them valuable discounts for multiple insurance policies or bundled policies. This is usually not the case; although the lender pays the premiums, the insurance policy is still in the borrower's name, which is all that most insurers require for the discount.
- house image by Cora Reed from Fotolia.com