Hazard insurance will be the component of your homeowners insurance which reimburses you for repairs or replacements in case your house or its contents are damaged. Some mortgage lenders require homeowners to add their monthly hazard-insurance premium as part of the normal mortgage payment. The premium is put in an escrow account, from which the lender pays the insurer.
Significance
If your home burns down and you can’t afford to rebuild, many lenders assume you won’t keep paying the mortgage, the Truth About Insurance website says. Before you close to a home, you’ll have to provide proof you’ve obtained hazard insurance. By requiring one to include the premium with your mortgage payment, your lender can be certain you don’t stop paying on your own insurance later.
Characteristics
If your lender sets up an escrow account, you’ll cover the business one-twelfth of your annual premium monthly; when your premium comes due, your lender pays it. Under federal law, your lender can take you cover a pillow to the account equivalent to two weeks of obligations, the Mortgage-X website says. Your lender may require you to include property tax and mortgage payments in the same account.
Benefits
If you have difficulty budgeting for big, semi-regular payments such as insurance premiums, making monthly payments will take care of that, Bankrate.com states. Additionally, it is convenient if you do not wish to keep tabs on any more obligations than you have to.
Drawbacks
A drawback of including your hazard insurance in escrow, Bankrate.com says, is that your lender might miss a payment. In addition, many insurance escrow accounts do not earn interest. However, a few states, including California, do require lenders to prepare interest-bearing credit card accounts and credit the interest — at an annual rate of 2 percent — to the borrower.
Alternatives
No laws prevent your lender from requiring a escrow account. If you’ve got a large enough down payment, however — 15 percent to 20 percent, generally — your lender might be willing to waive the escrow, Bankrate.com states.