Even if your home insurance premium is funded through an escrow account, you have the option to change insurance carriers. Switching home insurance companies with an escrow account is a straightforward process — you’ll just need to be proactive in keeping your insurance company and mortgage lender on the same page.
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.
Example of home insurance with an escrow account
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 $2,247:
- Property tax: $198
- Interest payment and principal: $1,597
- Home insurance: $188
- Total payment per month: $1,983
You would pay the total of $1,983 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 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 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
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. Your mortgage lender uses the funds in your escrow account to pay your insurance premium. If you don’t provide the most up-to-date documentation to your new insurer and payment information to your lender, your next premium payment could land in the hands of the wrong insurance company. This may cause a lapse in home insurance coverage. While you and your insurance agent can rectify the situation, your mortgage payments could drastically increase over the next 12 months if an escrow shortage occurs.
Hypothetical mishaps shouldn’t stop you from shopping around, though. The following steps break down how to change homeowners insurance companies to avoid a potential lapse in coverage or shortage in your escrow account.
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, your 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 and your mortgage loan number 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 company on file, so the mortgagee clause needs to be accurate 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. Your insurance 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.
It may also be a good idea to wait until your new policy has been issued before canceling your old one. Your prior insurer can backdate the cancellation if the new policy goes into effect before you cancel the old policy. That way, if there are any issues getting your new policy started or any corrections that need to be made, 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, 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 for the new policy year 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 by making certain that insurance premiums and taxes are paid on time and in full. 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 change your home insurance at any time if you have an escrow account. A premium increase at policy renewal is often a trigger for homeowners to shop for insurance to see if they can get better coverage or a lower rate. But if you don’t want to wait until your policy renews, you can shop for a new policy at any time and make the switch. Just make sure you take the proper steps, like providing the correct mortgage address and loan number to your insurance company for the new policy and matching the effective date to the cancellation date of your old policy to avoid a coverage gap. 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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