Homeowners insurance is important to both the operator and the mortgage lender, because it protects your investment in your home and the mortgage lender’s collateral. Because of this, most lenders require that you carry homeowners insurance as a condition of the mortgage. In many cases, the lender will also establish an escrow account that they will use to cover the insurance.
Mortgage Escrow Account
A mortgage escrow account is a special account that you fund and is managed by the mortgage business. The mortgage loan company will add about one-twelfth of the annual homeowners insurance premium to your monthly mortgage loan payments to fund the account. It is then the mortgage firm’s duty to cover the insurance in full and on time every year. To put it differently, this makes your monthly mortgage payments include the Insurance. Most mortgage lenders will require you to do that if your mortgage loan is 80 percent or higher of your home’s value.
Government Regulations
Mortgage escrows are governed by the federal Real Estate Settlement Procedures Act. Or RESPA, that is administered by the U.S. Department of Housing and Urban Development. RESPA allows mortgage lenders to require and handle these accounts, subject to government regulations. They can ask that you maintain a cushion of extra cash in your bank account, but not more than two months worth of escrow payments. The mortgage business is legally liable to you for the appropriate management of the bank account, including properly paying your insurance premiums.
Positive and Negatives
A significant benefit to you in having an escrow is you will not need to worry about maintaining your insurance present, because it turns into the mortgage company’s job. In addition, it allows you to budget the yearly premium automatically in your regular monthly mortgage payments. The big downside is that RESPA does not require the mortgage business to pay you interest on the bank account. Plus, if you feel you can get your cash on your own, it increases your monthly housing costs.
Other Considerations
As of publication, there are 15 states, including California, that require the repayment of interest on escrow accounts. California law requires 2 percent interest each year, net following any escrow fees. The interest payment must be credited to your account at least once annually. RESPA mandates your insurance payment be made in complete and on time from the escrow, as long as you are not more than 30 days late on your mortgage payments. If the mortgage company fails in this obligation, they are legally liable to you for any damages and expenses.