I was an insurance agent for many years before I retired to stay home with my son. One of the biggest headaches our office had was dealing with mortgage companies and the havoc they wreaked on our insureds. Most people have their mortgage companies escrow for taxes and insurance, so they money for renewals comes from them. Some mortgage companies were very good payers, and we rejoiced. Many other mortgage companies were so bad at paying their bills we employed someone whose sole job was to make sure the payments got made, and to act as a liaison between our insureds and the mortgage company when it was not.
What is an escrow account?
If your property is destroyed by a fire, the lender will have lost his collateral. Also if your taxes are left unpaid, your state can foreclose on your property in order to obtain payment and the lender could lose his collateral. Because the lender very much does not want to lose its collateral they want to make sure your insurance premium and property taxes are always paid.
When people buy a home and take out a mortgage they usually pay their first year’s insurance premiums up front, either directly to the insurance company or at closing. If you escrow for taxes and/or insurance the mortgage company also collects 2-3 months worth of additional premiums (and/or property taxes) at closing to start your escrow account.
The money in the account will be used to pay your taxes and insurance premiums when they become due. The amount in this account is based on the estimated amount necessary to pay these obligations each year. They make the assumption (often erroneous, but they have no way of knowing in advance) that your insurance and taxes will be the same next year. If the premiums go up at renewal they pay the higher amount and send you a bill for the additional amount disbursed on your behalf, and your mortgage payments will go up to reflect the higher amount. You receive no interest on this money.
Is escrowing required?
If you have a Conventional Loan and you do not have PMI (Private Mortgage Insurance), you have the option to close your escrow account and make your own tax and insurance payments. If you have a VA or FHA loan, the maintenance of an escrow account was a condition for the funding of your government-insured loan. In this case, the escrow account cannot be waived or altered.
I have an escrow account. What should I look out for?
The biggest mistake you can make when your mortgage company escrows for insurance and taxes is to think it’s not your problem to make sure it gets paid. It most definitely is. If you are not on top of things you can wind up paying more than you need to, or losing your coverage altogether, and then paying more than you need to.
Unfortunately it’s really not in your control, which is very frustrating. Here are some things you can do, though, to avoid cancellation due to non-payment:
1.Who is your current mortgage company? Has your loan been sold? Have you re-financed? It is your responsibility to let your insurance agent know if your mortgage company changes and request that your policies be updated. Don’t assume that they will contact your insurer to let them know. They don’t. And if the insurer doesn’t know, guess where your renewal bill will be sent? Yup. Can you spell d-e-l-a-y?
2. Make sure the correct mortgagee is added to all of your policies. Here in Florida many homeowners have three policies on their home; a regular homeowners policy (that covers fire, theft, etc.), a flood insurance policy (covers rising water), and a windstorm policy (covers hurricane, tornado and other windstorms). It’s very easy for agents to overlook one or more of your policies, so keep on top of it.
3. Call your mortgage company two weeks after you get your policy renewal notice. By that time they should also have received their copy along with the bill, and they will have had time to input it in their system. If the mortgage company has not yet received the bill get a fax number for the correct department so that you and/or your insurance company can fax them a copy of the notice.
4. Call your insurance company one week before the bill is due. If the insurance company has not yet received payment call your mortgage company to ensure payment has been mailed. If not, insist they “overnight” payment directly to your insurance agent (if your agent has the ability to accept renewal payments) or directly to the insurance company. Keep in mind that “overnight” often means 72 hours with many companies, which is why you should insist.
5. If payment is still not showing as received by your insurance company by the day before the due date, overnight them a check yourself (or if you have a local agent you can just bring a payment over). Yes, this sucks. Yes, it’s difficult to come up with the money. With some insurance companies you will have a grace period and not really have to do this. Here in Florida, however, many people are insured for regular Homeowners insurance through the state’s insurance program, Citizens Property Insurance Company. They have no grace period. No even a single day. Not even if it isn’t your fault. If your payment is late your policy lapses – meaning you lose coverage – and may have to have your policy re-written. A huge pain in the tushy you want to avoid. And your rate may be higher. Once your mortgage company pays one of you will get refunded (usually the money is refunded to the party whose check is received last). If the refund gets sent to the mortgage company you have to get them first to make sure it’s applied to your escrow account, and then that they mail you a check. A huge, huge pain in the tushy. BUT, better than losing coverage and suffering a loss, then having to sue the mortgage company.
Ugh. How do I avoid an escrow account, or get rid of the one I have?
I have a conventional loan, and I put 20% down so I wasn’t required to have PMI. My experiences with the myriad ways in which mortgage companies screw up was a major factor in my decision NOT to have my mortgage company escrow for insurance and taxes. I wanted to be responsible for getting my payments made on time, and I wanted to be able to earn interest on my money as I saved it. It’s like getting a discount.
If you have a conventional loan and have had or can have PMI waived (you’ll need at least 20% equity), talk to your mortgage company about letting you close your escrow and self-pay. Talk to a supervisor. This may be harder now due to the current mortgage crisis, but nothing ventured, nothing gained.
If you’re shopping for home financing, are eligible for a conventional loan and can put down 20% or more, make one of the questions you ask, “Must I escrow for insurance and taxes?” Some companies charge a point (a percentage of the loan amount) or offer a higher rate. I’d steer clear of those.
Of course if you don’t escrow you need to be disciplined about putting money aside to make those tax and insurance payments. Perhaps a little saving by delusion will help…
The preceding information is not advice, it’s just my thoughts and opinions. I’m just a girl on the web, not currently licensed in insurance or anything else in any state. You should absolutely seek the counsel of an insurance agent and/or a mortgage professional licensed in your state before taking any action at all. Coverages and programs discussed may or may not be available in your state.