As a homeowner, you may be familiar with escrow as a way to manage your homeowners insurance and property tax payments. Beginning Jan. 1, 2016, if you have flood insurance, you may also have the option to escrow your flood insurance premiums.
The change comes as a result of a final rule implementing the Homeowner Flood Insurance Affordability Act of 2014. It requires lending institutions that are not excluded from the escrow requirement to offer borrowers the option to escrow their flood insurance premiums and fees for loans outstanding as of Jan. 1, 2016. If your loan is eligible for this option, you should receive information from your lender by June 30, 2016.
Here’s what you should know about escrowing your flood insurance premiums.
What Is Escrow?
After purchasing your home, you may have chosen or been required by your lender to open an escrow account for your property taxes and homeowners insurance. Funds you deposit into this account (usually on a monthly basis) can then be used to pay these expenses on your behalf when they come due.
Many homeowners view escrow accounts as an attractive option for property taxes and homeowners insurance because these bills can be large and infrequent (usually due annually or semi-annually), and being able to pay them in monthly installments with a mortgage payment is more budget-friendly. If you have an escrow account that is set up such that your lender is supposed to pay the insurance premiums and tax bills, you should still keep an eye on the calendar and make sure that they are paid on time by your lender or servicer.
What Does it Mean to Escrow My Flood Insurance Premiums?
Escrowing your flood insurance premiums has similar benefits. If you qualify and choose to escrow them, your lender or servicer will collect your flood insurance premiums from you along with your monthly mortgage payment. With an escrow account, your escrow payments will accumulate over time to pay your flood insurance premium at its next renewal date. After setting up your escrow account, no further action may be required from you, other than making your new monthly loan payments.
In this way, escrowing your flood insurance premiums can save you time and help you budget your monthly payments. Rather than budget for one or two large flood insurance bills during the year, you can spread your payments over 12 months.
Why Is the Option Now Available?
In short, borrowers will now have the option to escrow their flood insurance premiums because of rising premiums. The hope is that being able to escrow the higher premiums will make them easier for policyholders to pay and manage.
Flood insurance premiums increased as a result of efforts to keep the National Flood Insurance Program (NFIP) afloat. In 1968, Congress created the NFIP to help homeowners in special flood hazard zones protect themselves from the high cost of flood damage. But the NFIP is now in debt, so reform efforts have phased out federal discounts for policies in high-risk zones, re-drawn flood hazard maps, and raised premiums over time.
While every home is in a flood plain, those in high-risk areas will see the biggest cost increases, and all NFIP policies will be subject to an annual surcharge of $25 for a primary residence and $250 for all others. If the rising cost of coverage is a concern, there may be ways to lower your premium and surcharges, such as increasing your deductible or raising the elevation of your home to lower your flood risk.
Note that smaller lenders and certain loans are exempt from the mandatory escrow requirement.
Change doesn’t have to be overwhelming, and escrowing your flood insurance premiums is your choice. By educating yourself on the updates now, you can take the time to assess all your options for the future.
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