For rental property owners, a mortgage payment is a lump sum that typically covers four items: mortgage principal, mortgage interest, property taxes, and landlord insurance. Many landlords have their mortgage companies pay their insurance premiums through an escrow account — a setup known as mortgagee billing. Others choose to pay their premiums directly to the insurance carrier.
How you pay your landlord insurance premiums depends on your mortgage terms and your own preferences. In this article, we’ll share the pros and cons of paying insurance through escrow billing versus direct billing and key factors to consider in your decision.
With mortgagee billing, your mortgage company is responsible for paying your annual property insurance premium on your behalf — using funds from your monthly mortgage payments.
Your mortgage company sets up an escrow account to manage cash to cover your premium and any other costs that the mortgage company pays on your behalf, such as property taxes. Many mortgage companies require this setup if you make a down payment of less than 20%.
An escrow account is a bank account that’s set up by your mortgage company, usually at the time of closing on a new property. The mortgage company puts a portion of your monthly mortgage payment into the escrow account to cover the costs of property taxes and property insurance, and any other expenses that the mortgage company is responsible for. The funds are held in escrow until the bill is due.
Here are the upsides of having your mortgage company pay your property insurance on your behalf:
That said, there are some factors to carefully consider when paying for rental property insurance through escrow, and many landlords prefer to pay directly to their carriers.
It’s fairly common for mortgages to get sold to another lender, so consider this scenario:
After your loan is sold, your mortgage company changes. But the old mortgage company doesn’t tell your insurance company about the change, so the insurance company sends the bill to the old mortgage company. As a result, the new mortgage company never receives the bill, and doesn’t make the payment — meaning your insurance coverage lapses. That means you have to go through all the hassle and paperwork of reinstating your insurance policy.
Even if you figure out what happened and want to pay the premium yourself, it’s harder for you to step in and fix it in an escrow billing setup — and you don’t want to risk double paying.
With that in mind, if your mortgage company changes, don’t ever assume that your old mortgage company will take care of communicating the change to your insurance carrier.
Be proactive in contacting your insurance carrier about any changes to prevent any missed payments. When you receive a notification in writing that your mortgage was sold to another company, contact your insurance agent immediately and provide the new mortgage company information so they can update the mortgagee clause in your policy. The insurance company will then send you a new declarations page with the new lender details.
If you decide to switch insurance carriers and continue paying your premium through escrow, make sure your mortgage lender knows which insurance company to send your payment to.
Once you’ve chosen your new carrier, they’ll ask for your mortgage company’s information so they can add it to your new policy. The mortgagee clause includes your lender’s official name and the address that all policy documents and bills should be sent to (this address may differ from your lender’s business address).
Then, don’t forget to cancel your previous insurance policy and note the cancelation effective date so you can align that with your new policy.
Finally, inform your mortgage company that you switched insurers. Provide the new carrier details, your policy number, effective date and your new declarations page.
Whether you pay your insurance premiums through escrow or make payments directly to your carrier, landlords can use Azibo’s suite of accounting tools to save time and stay organized. Here’s how it works in both insurance payment setups:
Use Azibo to split your mortgage payment transactions into principal, interest, taxes, and insurance. Then tag each item by Schedule E category and assign them to a rental property to simplify tax prep.
If paying your insurance premiums directly, you can use your Azibo account to schedule one-time or recurring ACH payments from your bank account to your insurance carrier or provider, and then tag those transactions by Schedule E category and assign them to a rental property.
We recommend setting up rules in your accounting software to automatically tag transactions by category and assign them to properties. You can also make bulk edits to multiple transactions at once, including adding category or property tags or splitting transactions. For example, you can split and categorize 12 months’ of mortgage payments into principal, interests, and escrows in one step.
If you have the choice between paying property insurance through an escrow account set up by your mortgage or paying your premiums directly, your decision comes down to your own preferences.
Landlords should weigh the pros and cons of each — and decide whether they ultimately want to have the control and responsibility of paying their own insurance bills, or the control and responsibility of communicating with their carrier and mortgage company whenever there are any changes.
Azibo Insurance Services LLC, a wholly owned subsidiary of Azibo Inc, is a licensed insurance producer. Contact us to discuss your specific insurance needs.
Disclaimer: The information provided in this post does not, and is not intended to, constitute insurance advice; instead, all information, content, and materials are for general informational purposes only. This content may not constitute the most up-to-date insurance information. Readers must contact a licensed insurance agent or company to obtain quotes, advice, and guidance with respect to any insurance matter. No reader, user, or browser of this article should act or refrain from acting on the basis of information herein without first seeking the advice of a licensed insurance producer.
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