Home Insurance Online
Buying a new home is the most exhilarating and most stress-inducing moment in most anyone’s life. Find the perfect house often means spending ample time looking at imperfect homes, weighing options, wishing for a larger budget, and looking for a way to have your champagne home tastes on a cheeseburger budget. When you finally find the perfect home, you jump on it without hesitation. It’s time to make the offer, complete the inspection, and fill out so much paperwork you are certain you’ll never sign your name again as long as you live. Just when you think you’re finished, you have to find home insurance. It’s a pesky little task no one thinks about ahead of time, but it’s there at the end. You can’t buy a home with a mortgage without home insurance, and you need it to protect your home, your assets, and your finances.
When searching for home insurance, you have numerous questions. You ask around, you find answers, and you make decisions. One of the most important decisions you’ll make is whether you will pay your home insurance yourself or use escrow to pay it for you.
What is Escrow?
When you buy a new home, you are given the option to escrow your home insurance as well as your property taxes. For some buyers, this is not so much an option as it is a mandatory requirement. The first escrow account is held by the lender throughout the course of your mortgage. When your mortgage is calculated, your lender factors in the cost of your annual home insurance policy as well as your annual property taxes. Those funds are placed into an account where they’re disbursed to the proper entity upon coming due.
At the end of the year, you will receive a notice in the mail with a refund of your overpayments or a letter stating your mortgage is going up a few dollars to cover the cost of an underpayment. If your insurance and property taxes change, the escrow portion of your mortgage payment changes with it at the beginning of each new year. Your lender notifies you of this information when it becomes available.
To Escrow or Not to Escrow?
The question many new buyers ask is whether they should escrow. If it’s mandatory, there is no choice for the homeowner to make. If the lender isn’t making this a requirement, buyers might consider not going through with an escrow account. The pros and cons are obvious, but many buyers fail to consider the long-term effect it might have on their financial situation.
The Pros and Cons of Not Using Escrow
The biggest pro to forgoing an escrow account is a lower mortgage payment each month. If your property taxes are $4,000 per year and your home insurance is $1,250 per year, and your mortgage is $14,400 per year, your monthly mortgage payment is $1637.50. If you forgo escrow and pay your taxes and insurance on your own when they come due, your mortgage payment is only $1,200 per month. It’s significant and immediate savings.
The cons fall into place when your insurance and taxes are due. When your home insurance policy is due, you’ll have to come up with $1,250 out of your own pocket to pay the cost. You’ll then have to find $4,000 when your property taxes are due.
The Pros and Cons of Using Escrow
The biggest con of using escrow is the inflated monthly payment. However, it turns into a pro when homeowners consider they’re already paying for their home insurance and taxes each month rather than in one lump sum throughout the year. If you are saving monthly to pay those items without escrow, what’s the difference in paying them using escrow each month? It’s guaranteed savings, it’s less for you to worry about, and it’s less financial responsibility on your own shoulders.
Another substantial benefit of using escrow is the fear of financial strain. If you lose your job just before the taxes are due, you might not be able to pay those, your mortgage, and the remainder of your expenses. If you escrow taxes and home insurance, you have fewer bills to pay at one time, which might help keep you on your feet when something unexpected occurs.