Escrow and Home Insurance: Do I Need It?

Buying a home can be rather … confusing.

I mean, it’s stressful enough without all the confusing real estate and finance jargon. Why the heck can’t they put it in layman’s terms? Don’t they know we don’t buy a house every day?

It can be frustrating when people are spitting out these confusing terms at you and you’re just smiling and nodding your head, knowing very well you’re going to have to ask them to repeat everything they just said again. 

But that’s OK, that’s what we’re here for at Berry Insurance. We can’t help you with the whole process, but we do know the insurance part in and out. We’ve helped thousands of clients navigate the insurance process for a new home.

We can help you too. And we’ll promise to try to keep it simple. No fancy insurance lingo here!

We’ll start with escrow. It’s one of those words that you’ve probably heard, but may not understand. In this article, we’ll get into what it is, how it works, and if you should/need to do it.

So, what is escrow?

Escrow essentially means your mortgage and homeowners insurance (sometimes even your property taxes) will be lumped together in one payment. You pay that sum to your mortgage company, and your mortgage company pays for your insurance.

Here’s how it works:

Upon closing on your home, you will pay your entire first year insurance premium with your closing costs. After that, you will start to pay your mortgage company a monthly amount towards the next year's insurance premium. At the end of the year when the cost of the new insurance policy is established, you may need to pay more money if you underpaid the premium cost, or you may get a check if you overpaid.

Do I need to/should I escrow?

Well, this depends. In some cases, you will be required to escrow, and in other instances, the choice is up to you.

Mortgage lenders often require homebuyers to escrow, and almost always require first-time homebuyers to escrow. 

Homes are expensive investments, so many lenders require escrow to ensure homeowners have and pay for a homeowners insurance policy so any home damage will be covered and not the responsibility of the lender.

If escrow isn’t a requirement from your lender the choice is yours.

Either way you decide, the cost of your premium doesn’t vary -- just the way you’re paying does.

Many people prefer to escrow because they are making their insurance and mortgage payment in one easy payment rather than two. (Keep in mind, if you have auto insurance bundled with your home insurance, you will still get a separate bill for your auto -- but don’t worry, you won’t lose any bundling discounts.)

If you have been known to miss some payments or lose bills, escrow might be the right decision for you. The single payment will make it that much less likely that you will miss a payment and you won't be stuck with late payment fees or policy cancellation notices.

On the other hand, some people prefer to keep their insurance and mortgage separate -- it’s just personal preference.

The one thing to keep in mind when considering escrow is the inaccurate payments. Like we said, since you are paying ahead for the next year’s insurance policy, your payments are only a prediction of what your premium will cost so you will either be getting a check for any extra you paid, or having to pay extra you owe at the end of each policy. Some people don’t like the idea of this and would rather pay the exact amount each month.

Make the right insurance decisions for your home

To escrow or not to escrow  … if you aren’t required to, the decision is up to you.

But don’t sweat it too much -- you can’t really make a wrong decision here. 

When it comes to insurance, there are much greater things to worry about. For instance, if your home insurance is actually accurately protecting you, your family, and your home. 

If you haven’t already, make sure you are working with a trusted insurance agency who cares more about your protection than simply making a sale. To learn more about what you may want to look for in an agency, check out this article What to Look For when Selecting an Insurance Agency or Company.

And if you decide you're in need of a switch from your current insurance carrier, be sure to read our guide on how to switch home insurance midterm with an escrow account.