This is a YouTube video titled "Homeowner's Insurance on Loan Estimate and Closing Disclosure" containing a detailed explanation by Derek from McGowan Mortgages about how homeowners insurance is represented on loan estimates and closing disclosures, specifically clarifying the distinction between the upfront 12-month insurance payment and the escrow account for future insurance and tax payments. The content was created on July 29, 2022.
Hey, It's Derek from McGowan Mortgages. I wanted to talk a little bit about the homeowners insurance on the loan estimate or closing disclosure, the leo, the cd, because generally it lists in two different sections and that can get a little bit of confusion. So if we break those down, it makes a lot more sense. Well, the 12 months, let's start there. So this amount is designated to your actual insurance provider, the actual company, whether it's State Farm or Allstate or aaa, whoever it may be, the actual insurance provider, no matter who they are, they all collect 12 months of insurance right up front. The same way when I buy a house or anyone else has ever bought a house, the same format happens there where every insurance company wants to be 12 months in advance on everyone's homeowner's insurance across the country. And it does play into them having better quotes by doing that. Now it's your money. So if you were to sell the house or sell the mortgage refinance, down the road you get whatever prorated amount. So it's just kind of an upfront amount that's held by the insurance company. But that check, what really happens is the funds are collected at closing. The title company cuts that check directly to the insurance company and off it goes. Now the two, three, four, five months of insurance right below it, that's the escrow amount. So that's held in escrow generally with the title company or the servicing department. And that is like a slush fund, if you will. You'll see a couple months of taxes and a couple months of insurance right there in the same section. That is simply creating a slush fund, if you will, or a reserve fund stating that, hey, if and when taxes or homeowners insurance do go up in the future, and if there's nothing in that account, then it's run dry. And let's say, let's say insurance was a hundred dollars starting off per month, but a year or two down the road it goes to $105. Well, that escrow account has the extra amount so they can start pulling extra $5 from it until your payment reflects and Updates to the $105 a month insurance amount. So otherwise, in the past, before escrow accounts were a thing, the servicer would have to call you, the homeowner and bug you out of the blue and say, hey, you need to start paying us a couple dollars more. We don't have any money. They just collect it up front to create the extra headache. And I'm sure a bunch of calls for them.
