Should my homeowners insurance be combined into my mortgage payments or is it better to pay as a separate bill?
You should definitely go and get your own individual homeowners insurance policy that would qualify as coverage under your loan. Your bank is covering their “property at risk” and NOT your home and its contents. There is a BIG difference in what they are covering and what you would want covered.
Most importantly, they do NOT care about shopping the coverage to get the best price. You are most likely paying too much for too little coverage.
Do yourself and your family a favor and take the time to contact a couple of property & casualty insurance agents and get some quotes and advice. Weigh each of their recommendations and go with the Agent that you understand and has explained the different coverages and why you might need them. Your decision should NOT just be about finding the lowest cost.
I hope this helps. I would be happy to answer any follow up questions you may have regarding your mortgage payments.
| 11.10.15 @ 17:03
Your question seems to be about whether or not to escrow for the (taxes and) insurance.
In most cases, it's better to escrow (ie, include the amount with your monthly payment). The lender will generally charge just a bit more if you're not using the escrow because their collateral (your house) is more at risk if they leave you in control of making the payments. You also end up with fewer bills to manage. It becomes the responsibility of the loan servicer to pay the bill(s) on time.
The cases where using escrow may not make sense is in communities / properties where the tax and/or insurance costs are high and you might make better alternate use of that cash until the due date. For instance, if the tax bill is $25K/yr, you might rather invest that cash until it's due.
Hope that helps.
Dan | 11.10.15 @ 19:43
I disagree with the advice given by Dan as he’s clearly misread the question.
First: It seems he is confusing PMI (or Personal Mortgage Insurance) with Homeowner’s Insurance. These are VERY different! Further, there are NO covenants in any home mortgage that would allow the bank or lending institution to “charge you more” if you have obtained your own homeowner’s insurance. The lending institution doesn’t care as long as there is proper coverage. More importantly, the issue is not cost or who pays the bill but rather having “proper coverage” of your home for YOU and your situation. The bank will provide only basic homeowner’s insurance and will not care about obtaining competitive pricing.
Second: He is dead wrong that it might make more financial sense to “be in charge” of the money if your annual tax payment is $25,000 or more. IF (and that’s a BIG if today) you could find a cash account paying 1% you would earn an extra $250 for the whole year. Short term cash pays more like 0.05% which would earn you a whopping $12.50 per year for separating this out from your mortgage payment. His own reasoning shared earlier regarding “fewer bills to pay and having the bank responsible” makes more sense than separating this out given the economics of the transaction.
You should allow the impounding of PMI (if applicable) and taxes, but you should always obtain your own homeowner’s insurance. I trust this clarifies this for you.
| 11.10.15 @ 20:21
I believe Dan may have answered your question. I would add most of our clients escrow bill on renewal. The mortgage company collects and pays the insurance when it's due. Most clients like this as the insurance is paid and there are no surprises and one less bill. It is good to check your renewal bill. You will be sent a copy too. It is also wise to review or have your agent review your policies to ensure coverage is correct and pricing is in line.
However, If you have mortgage placed insurance - which is where the mortgage company purchases and bills you or adds to the mortgage payment if you don't escrow or don't pay the insurance on your own. It will be expensive and likely only cover their interests.
Ideally, it's best to have a good agent on your team to ensure you have the best coverage and the lowest cost.
Tim 11-10-2015 @14:18 Central | 11.10.15 @ 20:27
Tim adds some good points. Mortgage placed insurance (sometimes called forced place insurance) is quite expensive. The preventative is to be sure your insurer and investor are on the same page regarding minimum coverage requirements. Bradford is right in that a lender's insurance requirements may fall short of what your insurer might recommend; always your call to carry more than a lender requires.
Brad seems to be confusing home owner's insurance with mortgage insurance (PMI) requirements; your question seemed to be on the former but let's separate them and address both.
If you're required to pay PMI, it will always be paid via escrow. There are ways to avoid PMI but that's a different discussion.
It is true that on many mortgages, most investors do price in a slight hit (in price or rate) for waiving escrows. If you (or Brad) would like more specifics on how / when this comes into play I'd be glad to discuss off line. Suffice to say that it's not a significant impact. As an example, under conventional lending with 20% down on a $200K loan you'll suffer 0.25 in price (not rate) which comes to $500 as a one time cost (not a recurring cost) payable at closing. This is easily overcome through time if you have a 'large' amount paid through escrow.
While yields on savings accounts and such are tiny, "control" of your own money can mean self-guided investing or working with a financial advisor who (even in this market) should gain you more than a few points. It might also mean that you have a better use for the cash flow in the short term coupled with a glut of cash coming your way periodically (such as commissions earnings or gifts allowable under IRS rules) to pay the tax/insurance bill annually.
Bottom line: This is not a major decision in your home financing unless the tax or insurance bills are large. Make life easy. Use the escrow service. Almost all my clients do. | 11.10.15 @ 21:27