Your mortgage lender needs to ensure it is covered in the event of damage to or loss of your property. To ensure this, your lender will be added to your policy as mortgagee and escrow for the premiums. Your insurance payment will be added to your monthly principal and interest and the lender will remit that payment to your insurance company.
When your mortgage is approved, you contact your insurance company and add your lender as mortgagee. This lets the insurance company know that the mortgage company must be paid in the event of a damage claim against the property. It also authorizes the insurance company to interact directly with the lender. When you make this initial contact, let the insurance company know that you will escrow for the insurance payments.
When you escrow for insurance, the annual premium on your policy is spread out over 12 months. For example if your premium is $750, divide that figure by 12. This gives you a monthly payment of $62.50. This amount is added to your monthly principal and interest payment. When you submit payment to the bank, it puts the money in escrow until it is time for renewal
When you first get a mortgage, you pay your first year's insurance premium with your settlement fees. The portion collected each month with your payment goes toward the following year's premium renewal. When the policy is up for renewal, the insurance company bills your mortgage lender. The mortgage lender uses the money in escrow to renew the policy and the process starts over for the coming year.
Shortage and Surplus
At the end of each year, the lender performs an escrow analysis to ensure your payment is still in line with what it needs to be. If you've made changes to your policy or your company's premiums have increased, you may have too much or too little in your escrow account. If this happens, you will either be refunded in the event of a surplus or be charged the difference in the event of a shortage. This is because the bank will cover the difference when initially renewing a policy.