How to switch homeowners insurance when your escrow pays your premium
If your home insurance premium is funded through an escrow account and you want to change carriers, don’t be deterred by the prospect of a bit more paperwork. Switching home insurance companies with an escrow account is a straightforward process — you just need to take some simple extra steps to keep your insurance company and mortgage lender on the same page. Bankrate’s guide on how to change home insurance with escrow can help you understand the right process.
How homeowners insurance works with escrow
When you have a mortgage escrow account, a portion of your monthly mortgage payment is earmarked for your home insurance premium and other expenses like property tax. Essentially, you pay a month’s worth of your annual homeowners insurance premium to your mortgage company each month. The amount is then held in your escrow account. The money accumulates until your insurance policy renewal, when your mortgage lender makes a payment for the full amount to your home insurance company.
You buy a house worth $300,000 and put down 20 percent. To finance the rest of the purchase, you establish a 30-year mortgage with a 7 percent interest rate. Here’s what your monthly mortgage payment may look like based on an annual home insurance premium of $2,151:
- Property tax: $198
- Interest payment and principal: $1,597
- Home insurance: $179
- Total payment per month: $1,974
You would pay the total of $1,974 each month to your mortgage company and it would set aside funds from that payment for property tax and home insurance in an escrow account. In most cases, your mortgage company manages the escrow account, but it could also be a separate trusted third-party — the homeowner rarely ever controls the account. The entity in charge of the escrow account takes the funds to send regular payments to your local government for property tax and your insurance company for your homeowner’s policy.
If you put down less than 20 percent, you would also need to pay for private mortgage insurance (PMI) until the balance of your loan reaches 20 percent. Those PMI payments would be included in your monthly mortgage payment and be routed to the escrow account.
When you might want to change home insurance with an escrow account
If you have a mortgage and pay your home insurance with an escrow account, switching companies can be a bit more complex than it would be if you owned your home outright. But you have the right to choose your insurer, regardless; a mortgage lender can’t require you to use any specific insurance company. Here are some scenarios when you might want to consider moving your home policy to a new insurance company, even if you have an escrow account:
- You want to find a cheaper policy: If you’re looking for cheap home insurance, shopping around is a good strategy that allows you to compare rates. Because your insurance premium affects how much you pay into your escrow account each month, a cheaper policy could result in a lower mortgage payment when your company does its escrow analysis.
- You’re refinancing: Refinancing could provide a good opportunity to see if you can find a cheaper home insurer to help reduce your monthly costs even further. You don’t have to change insurance companies if you’re refinancing, but it could provide a good opportunity to see what else is out there.
- Your needs have changed: If you’ve started a home business, purchased a certain breed of dog, made specific changes to your home, or experienced a life event like getting married or having a baby, you may find yourself in need of a specialized coverage type that your current insurer doesn’t offer. Looking for a new home insurance company may help you get a policy that fits your new needs.
- You had a poor service experience: If you’re not happy with the service you’re receiving with your current insurer, you may want to shop around. Service is an important part of the insurance experience, and you want to make sure you find a carrier that you trust.
Read more: Best homeowners insurance companies
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How to change homeowners insurance with an escrow account
Paying your home insurance through escrow can be convenient, but if you want to change insurance providers, things can get a little tricky. You need to make sure your mortgage lender knows which insurance company to send your payment to. Otherwise, your premium could go to the wrong carrier causing a lapse in your home insurance coverage. While you and your insurance agent can rectify the situation, it can cause your mortgage payments to drastically increase over the next 12 months if an escrow shortage occurs. Don’t let this stop you from shopping around, though; you can still change carriers, you just need to be aware of the steps to take.
1. Shop for and choose a new carrier
If you’re wanting to change homeowners insurance companies, your first step is to shop around. Understand your coverage needs, budget and the features you’re looking for (like a certain discount or mobile app) and research companies that could fit your situation. Once you get quotes and choose a company, you can proceed to the next step.
Read more: How to choose the best home insurance company
2. Confirm the mortgagee clause for your lender
Before you purchase your new policy, you’ll need to know exactly how your mortgage lender should be listed. This is called the mortgagee clause and includes your lender’s official name and the address where all policy documents — including your renewal bills — will be sent.
The mortgagee clause is not just your lender’s name and the address to which you send your monthly payments; most companies also have unique addresses for insurance documents. To ensure you include the correct information on your new insurance policy, call your mortgage company to confirm. Then, relay the information to your new insurance carrier before you purchase your new policy.
Often, the purchase of the policy automatically generates documents to be sent to the mortgage on file, so the mortgagee clause needs to be correct from the start to avoid confusion and a potential insurance lapse.
3. Purchase your new policy
Once you know the mortgagee clause on your new policy is correct, you can go ahead and finalize the purchase of your new policy. An agent or company representative will walk you through the steps, but you’ll likely have to sign an application and any other required forms related to your coverage. Because you’ll pay your insurance with escrow, you will not need to make a payment out of pocket. Your new insurance company will send a bill to your mortgage institution.
4. Cancel your prior policy
Now that you’ve purchased your new policy, contact your current home insurance carrier to cancel your prior policy as of the same date your new policy is effective. Ensuring the dates are the same will prevent any overlap or gap in coverage. Even if your new policy is effective in the future, it’s still a safer process to start the new policy before canceling your old one. That way, if there are any issues getting your new policy started, you still have coverage through your old policy.
5. Notify your mortgage company
Your mortgage company should receive a cancellation notice from the prior insurer and a declarations page from the new insurer, but it can help avoid confusion to let your mortgage company know that you’ve switched insurance providers. You’ll likely need to provide the cancellation date of the prior policy and the effective date of the new policy (which should be the same date to avoid a lapse), as well as the name of the new company and the policy number.
6. Send any premium refunds to your new escrow account
You may receive a prorated premium refund from your prior insurer if you switched companies midterm. If you switch companies at your renewal period, you won’t get a refund, as all of your annual premium has been used.
Generally, you should contact your mortgage company to find out how to send this money back to your escrow account. While you could keep it, doing so could mean that your escrow will have a shortage and you’ll have to pay higher monthly mortgage payments to rebuild your escrow amount.
Frequently asked questions
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Escrow accounts are specialized savings accounts used in conjunction with mortgage repayments. These savings accounts, also known as impound accounts, receive a portion of your monthly mortgage payment to direct toward property expenses like home insurance and property taxes. The account is meant to take some of the logistical complications off the homeowners plate while also protecting the mortgage lender’s interests. Generally, escrow accounts are arranged and managed by the mortgage lender on behalf of the homeowner.
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You might not be required to pay your home insurance with escrow, but it depends on the mortgage company and the terms of your home loan. Most lenders require borrowers to have an escrow account for things like insurance and property taxes, especially if you have a government-backed mortgage. Others allow you to opt out of escrow, which makes you responsible for paying all insurance, taxes and other related expenses directly. You may qualify for a discount from some companies if you pay the premium annually like the lender does. If your home is paid off, then you won’t have an escrow account, as there is no lender.
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Yes, you can switch your home insurance anytime, even if you have an escrow account. Homeowners typically change insurance providers upon receiving their renewal paperwork due to a premium increase. However, if you need better coverage or find a lower rate during the year, you do not have to wait for the renewal. Remember to deposit any refund from switching companies into your escrow account to avoid an escrow shortage.
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If your mortgage company doesn’t pay your home insurance, you will receive a bill from the insurance company. If this happens, contact your mortgage company immediately to find out why it hasn’t been paid. Even if you have an escrow account, it’s ultimately your responsibility to make sure your premium is paid on time. Working with your lender can help ensure the premium is paid before the policy lapses. If the policy is canceled for non-payment, the mortgage company can force-place insurance on the home, which the company chooses but you are responsible for paying. Force-placed insurance is usually more expensive than getting your own insurance and may not offer the same coverage as your current homeowners insurance policy does. In a worst-case scenario, you may have to pay your home insurance premium while waiting for the payment to be sent from your escrow account to avoid a potential lapse.
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It could. However, your escrow payment depends on more than just your home insurance premium. If you decrease your insurance payment by $15 per month, but your property taxes go up by $20, your total escrow payment may increase.
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