Understanding Escrow: Is Home Insurance Covered?

When purchasing a home, there are many financial aspects to consider, one of which is escrow. Escrow is a financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. It helps make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow company. One common question that arises in relation to escrow is whether home insurance is included. This article aims to provide a comprehensive understanding of this topic.

What is Escrow?

Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The escrow agent holds the funds or assets until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled.

Is Home Insurance Included in Escrow?

Yes, typically, home insurance is included in escrow. When you take out a mortgage to buy a home, your lender will usually set up an escrow account. This account is used to pay property taxes and home insurance premiums on your behalf. The cost of these is divided into 12 monthly installments, which you’ll pay along with your mortgage payment.

Why is Home Insurance Included in Escrow?

Home insurance is included in escrow to protect the lender’s investment in your property. If a disaster were to happen and you didn’t have insurance, you might not be able to afford the repairs and could default on your mortgage. This would leave the lender with a damaged property that’s worth less than the loan. By including home insurance in escrow, the lender ensures that your property is always insured.

What Happens if I Change My Home Insurance Policy?

If you change your home insurance policy, you need to inform your lender and escrow manager. They will adjust your escrow payments to reflect the new insurance premium. If the new premium is lower, your monthly escrow payment and thus your total monthly mortgage payment could go down. If the new premium is higher, those payments could go up.

Conclusion

In conclusion, home insurance is typically included in escrow as a way to protect the lender’s investment in your property. It’s important to keep your lender and escrow manager informed of any changes to your home insurance policy, as this can affect your monthly mortgage payments. Understanding how escrow works can help you manage your finances effectively when buying a home.