Simple Real Estate Definitions : Tax And Insurance Escrow
As a homeowner , your fiscal responsibility extends beyond just making mortgage payments. You must also pay your home’s real estate taxes as they come due, as well as your homeowners insurance policy premiums.
Failure to pay real estate taxes can result in foreclosure. Failure to insure your home is a breach of your mortgage loan terms.
There are two methods by which you can pay your real estate tax and homeowners insurance bills.
The first method is to pay your taxes and insurance as the bills come due, usually semi-annually. Depending on your home’s tax bill size and the cost to insure your home, these payments can feel quite large — especially if you’ve failed to budget for them properly.
The second method of paying your taxes and insurance is to give your lender the right to pay them on your behalf, a process known as “escrowing for taxes and insurance”.
When you escrow your real estate taxes and homeowners insurance, you pay a portion of your annual obligation to your lender each month, which your lender then holds in a special account for you, and disperses to your taxing entities and insurance company as needed. Lenders prefer that homeowners escrow taxes and insurance because, in doing so, the lender is assured that tax bills remain current and that homes stay insured.
Want a discount on your next mortgage rate? Tell your lender that you’re willing to escrow.
To help calculate your monthly escrow payment to your lender, do the following :
- Find your home’s annual real estate tax bill
- Find your home’s annual homeowners insurance premium
- Add the two figures and divide by 12 months in a year
The quotient is your monthly “escrow”; the extra payment you’ll make to your lender each month along with your regularly scheduled principal + interest payment. Then, when your tax bills and insurance premiums come due, your lender will make sure the payments are made on your behalf.
If you’re unsure whether escrowing is right for you, talk to your loan officer and/or financial planner. There are valid reasons to choose either path.
What should I expect from my insurance agent/agency when I buy a new home?
Insurance is a part of your home closing process. So, outside of being sure that you have an agent that cares about your purchase and protection, offers a reasonable rate and appropriate coverage, you want to make sure that there will be no hiccups in your closing process!
Some insurance companies have specific issues with certain properties that can cause a delay if they are not addressed in a timely manner. Consequences of not doing this include delays in closing your home, delays in financing,and even possibly losing your deposit and the home if you miss your close of escrow date.
A few examples of things that can cause delays in your insurance are:
- A house that has Knob and Tube wiring is extremely hard, if not impossible, to find coverage for and can cause delays in closing if it can even find the appropriate coverage.
- A house with less than 100 Amp service is again not going to be cheap, if its even available.
- If the property has un-repaired damage to it, especially if visible from the street, may cause an insurance carrier to cancel the policy.
- If there are tree branches touching the roof, or moss of the roof, you are in for difficulties with your insurer.
Making sure these obstacles are addressed before you get to the closing table is important! But, don’t fret! Good communication between your insurance agent, Realtor, loan officer and title company will be sure that your closing goes smoothly and all these issues are addressed and won’t be surprises later.
It’s always a good idea to be cognizant of these types of issues and be proactive in preventing them.
If you have any questions on this please feel free to contact me at ctrowbridge@farmersagent..com or 1-650-Farmers.
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What are my options with Home Owners Insurance and how do I figure out what I need?
Homeowners insurance is provided with a basic package that covers most things like dwelling, personal property, liability, loss of use, and separate structures already included. Variations of this basic package are available depending on how your home fits the criteria insurance companies look for, such as owner occupied, multi-unit, or owner occupied with renters. These same variations are available for the different types of ownership as well; that is homeowners, condo owner, or landlord.
Essentially, to begin to answer this question you first need to see what boxes your home and needs fit in. Do you live in your home but have roommates? Do you have multiple units? Are you a landlord? Then you need to see what the basic package of insurance offers you in terms of coverage and assess your own personal property and expenses and see if extra coverage will be needed to cover your needs. If so your insurance agent will know how to adjust your homeowners insurance to cover the extra.
How do you assess what is needed? Take a realistic look at what you are trying to protect. Find the local cost per square foot (This information can be found by calling some of your local builders and asking them if a house burnt to the ground what would it cost (per square foot) to rebuild it?) and take that and multiply it by the square feet of your home to get your appropriate dwelling coverage amount. You should also account for any Extended Replacement Coverage in that calculation. Add up all your personal property to make sure you have enough coverage to replace it.
Don’t worry– a good insurance agent can help you to figure all of this out as well, but having an idea of where you stand when you go to speak with them can help the process and make sure you have everything you need.
Also, with homeowners insurance you should consider flood and earthquake insurance as these do not come standard with homeowners insurance policies. Even when the risk of flood or earthquake may be rare, not having the appropriate insurance to cover these occurrences can be costly.
If you have any questions on this please feel free to contact me at ctrowbridge@farmersagent..com or 1-650-Farmers.
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