Home Insurance Escrow 101

How does the escrow work? This comes up fairly often when new home buyers are buying home insurance for the first time.  Escrow is defined “as a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met (such as the fulfillment of a purchase agreement).”

Got it. In this example the third party is the lender themselves. Whether or not the lender has a separate entity that is considered to be a legal third party, I do not know for sure. So how does the escrow account at the mortgage company work for your home insurance?

As a part of your loan agreement when purchasing a home, most of the time a stipulation of the loan agreement is to escrow your home insurance and property taxes.  This means that the escrow account or neutral 3rd party account will collect money and hold it until it is time to pay for your home insurance or property taxes.  A year after you purchased your home, the home insurance will be renewing the annual policy. The Home Insurance Company will send an invoice to the Escrow Department to make the home insurance payment for you. This is what “Escrow Billed” is. The payor or entity paying your home insurance is the Escrow account. If it was billed to you the homeowner, it would be direct billed. Meaning direct billed to the customer.

Why do they require this for home insurance?   As a part of your loan agreement, you are required to maintain home insurance. By collecting your payments for you (escrowing) and paying the home insurance renewal, it helps secure their loan requirement and protects their financial interest.  

Carrying Homeowners Insurance on your home helps protect the loan that the bank has provided. This is why the Mortgage company is listed as an Additional Insured on your Home Insurance policy. An Additional Insured has ownership rights to the property. They have what is called an insurable interest in home. They mortgage company is still a financial owner of the property until the home is paid off. If the home is damaged in any way, the mortgage company has a right to make sure the home is fully repaired to protect the financial interest in the property.

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