Why collect 2-3 months of insurance premium at closing when we are paying the first year of premium already?
Thursday, February 16, 2012
A borrower pays one year of insurance premium up front to keep the home protected for one year from the purchase date. For example, if one closes on February 10, 2011; so that first year premium gets one through to February 10, 2012. However, although the loan closed on February 10th, the first mortgage payment is not due until April 1st. So the mortgage company does not begin receiving the monthly mortgage payments (which would include your monthly escrow amount consisting of your insurance and tax amounts), until April 1st. Since the mortgage has escrows, the mortgage company must pay the borrower’s yearly insurance premiums and tax bills on time. In this example, your next full year of insurance premium is due February 10th 2012; your mortgage company must send that full year payment out around the middle to the end of January to ensure it gets to the insurance company and credited to your account on time (must allow for mail-time and processing time on both ends, insurance companies and mortgage companies are typically handling a lot of payments and checks so it can take some time). So by the month of January the mortgage company has only received 10 months of monthly payments from the borrower (April through January payments). The mortgage company need 12 months worth of payments to pay the insurance. So to eliminate the need to contact the borrower at that time and have he/she send additional escrow money in, the lender takes care of it at the closing when they initially set up the escrow account. They put the 2-3 months of additional escrow in the account to ensure that when the bill comes due they will have enough in your account to pay it. If they did not, there would be 10 months or so only, and the escrow account would already have a shortage less than a year into the mortgage.
