How does paying home insurance from an escrow work?
How does paying home insurance from an escrow work?
I am purchasing my first home, and getting quotes on home ins. How does it work if you decide to use your escrow account? Is this your home's escrow account? I know you would need to bring your 1st years premium to closing, but just a little unsure of how this works. Would this mean I would not have a monthly payment to the ins. company? Newbie here, and need all the advice I can get!
Usually the mortgage company requires that your insurance company send them proof of insurance and a paid receipt for the first year's premium 3 or 4 days prior to settlement. The settlement company will then collect 2 or 3 months worth of the insurance and taxes and forward the monies to the mortgage company to start your escrow impound account. Your monthly mortgage will then include principal, interest, taxes and insurance (also known as PITI). The annual amount for taxes and insurance is divided by 12 and collected on a monthly basis by your mortgage company. Your homeowners insurance company will be instructed to bill the mortgage company and they will send payment from your escrow account. Your mortgage company will also request a copy of your property tax bill from your local tax assessor's office and pay this bill from your escrow account.
After 12 months your mortgage company will then do an escrow analysis to make sure that they always have enough to pay your taxes and insurance and have a cushion equivalent to 2 or 3 months of the yearly total on hand. If at any time the bills they receive significantly surpass their calculations, they will still pay the bill but your escrow account will then become negative and they will send you a bill for the shortage and also increase your monthly payment to maintain a positive balance in your account. By the same token if they have over calculated they should also adjust your monthly payment downward and/or send you a check for the difference if it is significant.
You do need to make sure that they mortgage company pays each of these bills every year since there have been instances where they did not and it can lead to some very tragic results if they don't. Ultimately it is still your responsibility to make sure both your taxes and insurance have been paid.
In addition you need to make sure that they do not over charge you since I have seen them increase the monthly payment by $50 (for example) even though the increase on the insurance for the year was only $30. If you do the math that increase would be $600 meaning they have increased the cushion by $570. In the vast majority of states the mortgage companies do not have to pay you interest on this money and if you add up the thousands of escrow accounts they handle it means they have the opportunity to "play" with a lot of other people's money!
I cancelled my escrow account years ago because I get fed up with the mortgage company's incorrectly calculating the monthly (of course they always calculated too high never too low). I pay my taxes and insurance just fine without their "help". In the end it is your own money and if you are a good manager, there is no reason to give up control of it.
Once you purchase your property you want to also look at the notices that detail future tax assessments and the rules for filing an appeal since many jurisdictions only give you 30 days to appeal any increase and sometimes it is totally necessary and recommended to file appeals to avoid skyrocketing taxes.
Also in one of the jurisdictions that I operate all homeowners are entitled to a Homestead Deduction for their primary residence that allows them to significantly reduce their taxes but you must file for the deduction every 5 years and unfortunately most new homeowners are not informed of this. In addition low to moderate income first time home buyers in this jurisdiction are entitled to a 5 year tax abatement (read no taxes for 5 years which can equal a savings of $5,000!) that must be filed within the first 18 months of purchase--again due to lack of information many miss out on this opportunity.
Make sure that you research any credits, abatements or deductions that you might be entitled to. Also it is my understanding that the new stimulus bill includes an $8000 federal tax credit for first time home buyers or buyers that have not owned a primary residence for the last 3 years--check with your local tax specialist.
I hope this helps. Good luck & congratulations on the purchase of your new home!