Advantages & Disadvantages of Paying Your Homeowner's Insurance Up-Front or at a Closing

Homeowner's insurance covers a variety of normal hazards including theft and wind damage.

Home insurance coverage offers owners protection against losses from theft, fire or ordinary weather damage. Extreme natural disasters, including floods and earthquakes, require separate hazard insurance policies. New homeowners can take out policies before the close of escrow, or allow the lender to provide temporary insurance coverage until the owner shops to obtain a personal policy. Insurance arranged through mortgage companies typically costs more than private policies obtained by the homeowner.

Up-Front and Closing Premium Payment

The term "up-front" or closing payments refer to cash paid to vendors during the escrow process. Real estate purchases typically involve a neutral party paid to hold payments and collate paperwork related to the sales or trade process. The escrow company ensures that all parties to the real estate transaction meet state and federal laws. The escrow officers also confirm that the details of the sales contract are met, including the buyer obtaining homeowner's insurance as mandated by the mortgage lender.

Insurance Payments at Escrow

Optional escrow services also include managing local property tax payments and homeowner insurance demands made by mortgage lenders. Buyers have the option, for an additional escrow fee, of funding homeowner insurance through an escrow account. This process is called paying the insurance premiums "up-front" or during the escrow closing process. The buyer contributes the premium amount to the escrow account and the company makes the payment concurrently with the close of escrow on the home. The payment options include bi-yearly, monthly or a lump sum in one yearly payment.

Advantages

The advantages of paying your homeowner's insurance fees in one lump sum during escrow include a cash savings. Insurance companies typically charge an additional fee to pay over time or to bill for later payments during the year. Additionally, when the escrow account makes the homeowner payments, the owner is free from the chore of remembering the payments. The regular payments also help owners when they're budgeting for the year. The homeowner can plan for that fixed amount each month.

Disadvantages

The disadvantages to paying the homeowner's insurance at closing includes the rapid decision-making necessary to obtain an insurer familiar with the home, or an insurance agent who can inspect the property quickly, before the close of escrow. Other negative aspects include the inflexibility of a large amount of funds being paid at one time to an insurance company, when other moving bills are coming due. While some homeowners manage spending by adjusting accounts during the year, escrow accounts that set monthly, bi-annual or annual payments fail to allow that option. When escrow terms mandate a monthly payment, the funds must arrive in escrow even if the insurance bill comes due many months later.

References

• The Associated Press; Irene - What to Expect if Filing Homeowner's Claim; Eileen AJ Connelly; August 2011
• Fox Business; Preparing for the Worst - How Hurricane Insurance Works; August 2011
• State of New Jersey Department of Banking and Insurance; Home Insurance Basics; 2008
• Mortgage Bankers Association: What's in a Mortgage Payment?
• Chase Home Loan Glossary; Home Mortgage and Lending Terms; 2011
• Progressive: Homeowner's Insurance Quote
• Realtor.com; What Is Escrow?; Broderick Perkins
• Fannie Mae; Understanding Escrow - What is Escrow?; 2010