What is an escrow insurance account?

By Allstate

Last updated: January 1

If you're considering taking out a mortgage to buy a home, you might have heard the term "escrow account." If you have a mortgage, you might already be making escrow payments. Understanding how escrow accounts work may help you with your financial planning as a homeowner.

Sometimes a mortgage lender requires you to open an escrow account, says the Federal Deposit Insurance Commission (FDIC). Including your homeowners insurance costs in this account may help you plan ahead and keep your home protected.

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How can an escrow account pay for homeowners insurance?

An escrow account is a separate bank account you maintain with your mortgage lender. An escrow account can help you set aside money each month for bills that relate to your property and usually come due as a lump sum — such as property taxes and homeowners insurance — as well as other bills such as private mortgage insurance.

When you have an escrow account, you make a single payment, usually monthly, which includes both your loan payment and your escrow payment, the Federal Trade Commission explains. Typically, your escrow payment covers part of your property taxes, mortgage insurance and homeowners insurance.

In some states, you may be able to earn interest on the balance in your escrow account, according to the Department of Housing and Urban Development (HUD).

When your taxes and homeowners insurance fall due, your mortgage lender generally uses the funds in the account to pay those bills on your behalf.

Benefits of an escrow insurance account

There can be a number of benefits to having an escrow insurance account. For instance:

  • An escrow account may help you make sure you set aside enough money each month to pay for annual, lump-sum expenses like insurance and taxes, says the FDIC.
  • The mortgage lender generally takes care of paying your mortgage insurance and property taxes. The FDIC notes that if you don't have an escrow account, you'll have to make those payments on your own.

If you have an escrow account, the FDIC explains it's still important to check your statements from your tax authorities and mortgage insurer, to make sure your bills are being paid correctly and on time.

Having an escrow insurance account may give you peace of mind by helping you budget for some of the annual costs that come with being a homeowner.