Many homeowners have an escrow account set up by their mortgage lender to cover homeowners insurance and taxes. This is a convenient way to pay costs associated with your home, but if you’d rather pay for insurance on your own you may have some options. Before you decide to drop your escrow, be sure to consider the benefits it provides.
Unless you no longer hold a mortgage on your home, you'll most likely be required to keep your homeowners insurance in escrow.
Mortgage lenders setup escrow accounts to make sure that borrowers pay for taxes and insurance, since not paying these costs could damage the bank’s investment. Each month, the borrower makes a combined payment that includes a mortgage payment and a deposit for the escrow account. The amount due for the escrow account is calculated by the lender at the beginning of each year, based on a forecast about taxes and insurance costs. When taxes and insurance payments are due, the mortgage lender uses the escrow account to pay them on the borrower’s behalf. Most borrowers appreciate the convenience of not having to worry about tax and insurance payment deadlines throughout the year.
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. 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. Finding a lender who offers mortgages without escrow can be difficult; some lenders no longer offer that choice. If you are successful in forgoing an escrow account, you will be responsible for paying your taxes and insurance in one or two lump sum payments per year. One of the benefits of not having a monthly escrow payment is that you’re free to invest that money as you please throughout the year, including in a CD or interest-bearing account, as long as you can the tax and insurance payments when they’re due.
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.
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