Paying Homeowner's Insurance & Property Taxes With Your Mortgage Through an Escrow Account
Paying your homeowner’s insurance and property taxes as part of your mortgage is called “escrowing” your insurance and taxes.
Escrowing Homeowner’s Insurance & Property Taxes
Your monthly mortgage payment will cover your property taxes and homeowner’s insurance (HOI) when a mortgage requires that you pay for these through ‘escrow’.
Each month, your monthly property taxes and homeowner’s insurance expenses go into an ‘escrow account’ held by your mortgage servicer (this is who you actually pay for the mortgage).
Escrowing taxes and insurance makes keeping up with taxes and insurance much simpler, which is why lenders give lower interest rates to borrowers that escrow vs. paying these expenses on their own.
Homeowner’s Insurance - Escrow Payments & Closing Costs
One year (12 months) of homeowner’s insurance is purchased in advance at closing when you purchase your home. Then, each month you pay 1/12 of your yearly insurance premium with your regular monthly mortgage payment.
After 12 payments (1 year), you have another full year of homeowner’s insurance to pay, which you have already paid for—the money is simply deducted from the escrow account.
In addition to the 12 months paid for the initial premium, 2-4 months of insurance premium are paid at your closing to fund the escrow account initially. This “cushion” is required to make sure the escrow account has a little bit of extra money in it to cover any changes to your insurance in the future (see below on “How are Homeowner’s Insurance Costs Determined?”).
Homeowner’s insurance is sometimes called “hazard insurance”.
How are Homeowner’s Insurance Costs Determined?
Homeowner’s insurance cost is determined by a number of factors , including:
Replacement cost of the home (higher cost = higher rates)
Age of the home (newer homes can be cheaper to insure)
Home square footage (larger homes are more expensive to rebuild and have higher premiums)
Number of primary inhabitants (larger households increase potential liability)
Construction type (fire-safe materials like masonry are cheaper to insure than wood)
Roof type (fire-retardant asphalt or metal is preferable to wood shakes)
PPC (Public Protection Classification, which measures the proximity of fire station, police, hydrants, etc. A "1" is the best; a "10" is the worst.)
Area claim history (if neighbors file lots of claims, it can increase your rates)
Personal claim history (if you file more than average claims, your rates will be higher)
Pets (dog with bite history or breeds considered more dangerous can increase rates)
Owner's credit score (statistics show that people with lower scores file more insurance claims)
C.L.U.E. report of the property, which lists claims filed by the previous owners in addition to you. If the cause of the claims has not been resolved, your rates will be higher.
Security or alarm system (alarms and monitoring help decrease rates)
Fire alarm system
Deadbolt locks
Neighborhood crime rate (higher crime areas cause higher insurance rates)
Attractive nuisances (swimming pools, ponds, machinery, playground equipment, trampolines) increase liability potential and insurance premiums
Property Taxes - Escrow Payments & Closing Costs
1/12 of your annual total property tax amount due is part of your regular monthly payment. These payments will also go into your escrow account.
Typically, 4-8 months of property taxes are paid at your closing to fund the escrow account initially. This “cushion” is required to make sure the escrow account has a little bit of extra money in it to cover any changes to your property taxes in the future (see below on “How are Property Taxes Determined?”).
The amount due at closing to fund the escrow account will depend on:
when you close,
when property taxes are due (differs by State),
how frequently property taxes are paid (differs by State)
Property taxes are also referred to as county taxes for your property.
How are Property Taxes Determined?
Property taxes are determined by the county you live in.
The property tax amount will be based on the “assessed value” (also known as the “estimated market value” or “EMV”) of your home. The assessed value can be different than the price you purchased your home for (though it may be similar). The assessed value is also not the same thing as the appraisal value determined by the appraiser when you purchase your home. A new assessed value can come every year and you will be notified by the county of the new value for your property.
Factors that also influence property taxes include:
The type of home and how you use your property (property classification)
primary use, such as a homestead,
single-family home,
apartment/condo,
townhomes,
multi-family owner-occupied,
second homes (cabin),
investment properties
overall taxes collected by your county, school district or city also impact your property tax rate
Get in touch if you have any questions on any of this!