Escrow For Home InsuranceHOME OWNER'S INSURANCE ESCROW HOME OWNER'S INSURANCE ESCROW Just as the lender has a vested interest in making sure that the property taxes are paid, the lender has an equally vested interest in seeing that the home is insured. I'm sure you are familiar with the term "collateral". Collateral is a piece of property that is surrendered to a lender to insure the amount of the loan. That way, if the borrower defaults (doesn't pay) on the loan, the lender can sell the property that was given as collateral and get some, if not all, of their money back. Collateral can be jewelry, a car, anything that the lender agrees to hold. With home lenders, your collateral is your home. However, the lender is kind enough to allow you to live in the home and use it as if you own it outright, even though the home technically belongs to the bank/lender. If the property ever sustains extensive damage or is destroyed, the value, of course, is significantly reduced. According to our example, the bank has allowed you to borrow money to purchase a home (and the land it sits on) worth $196,000. If, for example, a house fire occurred, and the house burned to the ground, the property value is reduced significantly. Land with no house has only a fraction of the value of a piece of land with a home on it. If you think from the perspective of the lender, their investment of $196,000 has taken a huge hit. However, if the property is insured, they can still get their money from you when your insurance pays out. If the home is not insured, everybody loses—the lender AND the homeowner. Long story short, to protect their investment, the lender will require you to insure the property. You will have to procure a homeowner's policy before closing. Your insurance agent will fax a "declaration of coverage page" (also called a "dec page") to the closing attorney as proof that the house has been insured. Just as the lender sets up an escrow account to pay your taxes, they will set up another escrow account to pay your home owner's premium as well. In my area of Georgia, a home valued at $200,000 can be well insured for $600 a year. Remember that the lender wants a cushion in the escrow account to keep it from overdrawing. Regarding your tax escrow account, the lender requires three months' worth to cushion the account. With your home owners' insurance escrow account, they require a full year's premium as a cushion. Staying with our example for a year of home owner's insurance, $600 will be added to your closing costs as another "pre-paid item" and held by the lender to pay your home owner's insurance premium. When we add the $600 for starting the home owner's escrow account to the $1950 for starting the tax escrow account, we have accounted for $2550 of the $6000 total in closing costs. The remainder will go for other items like the ones named in the bulleted section on page 1 under "PRINCIPAL". Remember, closing costs are charged to the borrower by the lender to cover expenses involved in setting up a home mortgage. In order to pay the premiums from year to year, the lender will divide the $600 annual premium into twelve equal monthly payments of $50 each. This $50 is added onto your monthly payment along with the principal, interest, and tax escrow payments. Remember the monthly principal and interest part of the payment is $1157.12. The monthly tax escrow part of the payment is 216.66. Now we have another part of our payment, the homeowner's insurance escrow payment, which is $50 per month. All these parts of the payment total up to $1423.78 per month -- so far. We still have one more part of our payment to consider before we will have an accurate estimate of the total monthly mortgage payment, and that is the P.M.I payment Read more about Escrow Payments, Principal, Interest, tax escrow, PMI dont see what you are looking for?....search againmortgage termsMortgage Term Glossarymortgage-terms-glossary-A-thru-D Mortgage-Terms-Glossary-E-thru-G mortgage-terms-glossary-H-thru-J mortgage-terms-glossary-K-thru-N mortgage-terms-glossary-O-thru-Q mortgage-terms-glossary-R-thru-Z PMI Private Mortgage Insurance Mortgage Interest- How to Calculate
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