How Homeowners Insurance Works With Your Mortgage and Escrow

When setting up a mortgage, lenders often create an escrow account, which combines property taxes and homeowners insurance with the mortgage payment into a single monthly payment. This streamlines the mortgage payment process, but the type and amount of escrow vary depending on several factors related to the property, lender, and loan.

Why Do Mortgage Lenders Require Insurance?

The state of Illinois, including the Illinois Department of Insurance, does not require a homeowners insurance policy to buy a house. However, most mortgage lenders require a minimum amount of dwelling coverage to mitigate their own risk in issuing the loan. Property coverage for the homeowner’s belongings is not usually required, but most providers recommend it.

Homeowners without insurance or whose insurance fails to meet their mortgage lender’s minimum requirements will receive an insurance plan from their lender. This arrangement is not advisable, as the generic policy is designed to efficiently mitigate the lender’s risk without actually providing the homeowner with the best protection or value. This policy will simply be added to the escrow account, increasing the non-mortgage portion of the owner’s monthly payment.

Note: Private mortgage insurance is another payment that rolls into the escrow, if the homeowner needs it. PMI is only required by lenders if the down payment is less than 20% of the sale price. Around 800,000 homebuyers use this insurance each year to save money on the down payment, though it increases their monthly escrow.

What are the Benefits of Escrow Accounts?

Escrow accounts mitigate the lender’s risk in a new mortgage, but they also provide homeowners with benefits that streamline their mortgage payment process. These benefits include:

• Making it more convenient for homeowners to pay their mortgage by reducing the lender’s three responsibilities (mortgage, property tax, and homeowners insurance) to a single monthly payment with one payment portal and one due date
• Adjusting for changes in insurance or tax values automatically based on annual reassessments, which may be paid out of escrow by the lender and then added to future payments, streamlining yearly reassessments and eliminating overage fees and guesswork from the process
• Making timely payments on insurance and taxes without requiring the homeowner to check their accounts, calculate premiums, and make manual adjustments

The escrow account streamlines the mortgage payment process for both the borrower and lender by rolling taxes, insurance, and mortgage into one monthly bill and adjusting the rate internally.

Estimated Escrow Calculation

Calculate the escrow on a hypothetical mortgage payment by adding the annual property taxes, home insurance premium, and private mortgage insurance (if applicable) and dividing the result by 12. For example, if a homeowner’s property taxes for the year are $4,000, the insurance is $2,000, and they don’t need PMI, the escrow payment per month will be: ($4,000+$2,000)/12 = $500.

How Do an Escrow Account and Home Insurance Plan Work Together?

The escrow account is not a fee homeowners pay; rather, it is a collection of accounts that they are responsible for paying. Paying insurance through escrow is the same as paying it manually, just with added conveniences. If providers change their insurance requirements or premiums, these would be automatically reflected in escrow.

This means that lowering a homeowners insurance premium in an escrow account follows the same steps as lowering it without one. Getting multiple quotes from competing carriers will provide the owner with a broader range of options. So long as the plan meets the mortgage lender’s minimum requirements, the broker or provider can switch them without affecting the status of the mortgage.

Plans can be changed without switching providers as well, such as by raising the deductible, which is the money that must be paid out-of-pocket before the insurance covers the damages. A higher deductible will usually lower the premium and, therefore, the monthly escrow payment.

Note: Shopping for a new policy does not impact the escrow, as homeowners are not required to notify their lender of their intent to switch. There is also no penalty from the lender for switching, provided the policy meets their minimums, which should be known to the insurer or broker. The escrow will only change by the difference in the monthly premiums.

Ask a Local Broker for More Information About Escrow Payments

At Pro Insurance Group, our team of brokers helps new homeowners find insurance policies that cover their mortgage lender’s minimums, provide valuable coverage, and keep their escrow payments in check. We can help you compare coverage with different providers, adjust the policies to your budget, and make sure you stay compliant and well-protected with your new mortgage lender.

Contact our team to learn more about escrow payments in Illinois and how we can help.