How to change homeowners insurance when you have an escrow account

Changing escrowed homeowners isn't much different than if you were paying for insurance directly, but there are a few more variables you need to consider.

Published November 26, 2018

In order to keep your home insured, you make monthly or annual insurance payments, or premiums, to your insurance company. Your insurer generally accepts payments in one of two ways: either directly from you, or through an escrow account established by your lender.

Escrow accounts are set up by your lender to pay for various obligations like property taxes, private mortgage insurance, and homeowners insurance. Under escrow terms, you make a single monthly payment to your lender. A portion of this payment goes toward your monthly mortgage payment, and the other toward your escrow account, the funds of which your lender uses to pay your aforementioned obligations. Escrow accounts are generally required by lenders if the down payment on your home is less than 20% of the home’s selling price, but you also have the option of setting up an account when its not required.

Escrow accounts make home insurance payments a pretty hands-off process for homeowners, but the thought of changing insurance when its being paid through an escrow account may seem like pain. However, you should absolutely shop around and compare quotes to make sure you’re getting the best coverage at the best rates. The process of changing policies, even when its paid through an escrow account, is fairly simple.

Learn more about how to change home insurance in escrow:

How do escrow accounts work?

When you take out a mortgage on a home and your down payment is less than 20%, there’s a good chance that your lender will require you put money into an escrow account to pay for homeowners insurance and property taxes. Since lenders require homeowners insurance anyway, an escrow account ensures that the payments are being made and their investment is properly protected.

The funds that go into your escrow account are paid as a part of one monthly mortgage payment. Your bill will very clearly state how much of your payment is going toward paying off the house, and how much is going into your escrow account.

Take a $2,000 mortgage bill, for instance. A portion of this bill, say, $1,500, goes toward paying the principal and interest on the home. The remaining $500 is your escrow payment, and that amounts to a portion of what you owe in insurance and property taxes for the year.

Every year, your lender will conduct an escrow review and adjust your escrow payment based on your insurance and property tax rate changes. So if your property taxes and home insurance are set to increase by $800 this year, your escrow payments would increase by about $67 per month.

Your lender will then send you an escrow review statement that explains how much your insurance went up and how much your property taxes went up. If you’re unhappy with your recent home insurance rate increases, you may be able to find lower rates with a different company.

Switching carriers when you’re paying insurance through an escrow account isn’t any harder than if you were paying for insurance directly, but there are more variables you need to consider.

For example, say you switch insurance companies six months into a $1,000 annual policy term. The policy you switched to is considerably cheaper, costing you just $600 per year. Since insurers prorate the term and your last policy has already been paid in full, you’d be issued a $500 refund check, and you have the option of either putting the funds into your escrow account or pocketing the refund.

Looking to switch insurers? Call and speak with a licensed representative at Policygenius, who can cancel your old policy, request a prorated refund if you paid for your old policy in advance, and get your new policy set up with your escrow account.

What happens when you change insurers with an escrow account?

If your home insurance payments are escrowed and you’re thinking about switching to a new company, you should think about the cost of switching and understand what each involved party – you, the insurance company, and the lender – need to do to get your new insurance up and running.

How much does it cost?

Cancelling your old policy in the middle of its term and firing up a new policy generally doesn’t cost you any added fees. On the rare occasion, insurance companies may charge you a cancellation fee, and if they did, it would be a small amount, like $25.

Same goes for your mortgage company, who may charge you a processing fee when they set up your new insurance information and recalculate your payments, but most large banks generally won’t charge you.

However, escrow accounts in general may cost you more than if you were just paying your insurance premiums and taxes out of pocket. That’s because banks tend to pad your account with additional funds to prevent your account from shorting in the event of unexpected insurance and tax increases, so you’ll often pay more into escrow than what you actually owe for insurance and taxes.

By law, your bank can’t pad your account with more than two months of taxes and two months of insurance, so if it's determined during your escrow review that your account has more than that, then you’re entitled to a surplus check at the conclusion of the review period.

On the inverse, your new policy may cost you more than your old policy. If that's the case and you cancel your old policy early, you may want to put whatever refund you’re owed directly into your escrow account to avoid a shortage.

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What you need to do

When you switch insurers, you’ll want to have your old policy and mortgage information on hand so that the new insurance company can incorporate the coverages, limits, and mortgage account information into your new policy. Whatever changes in coverage need to be made generally occur after the insurance adjuster pays you a visit.

As soon as you have start date for your next policy, contact your current insurer and let them know you won’t be renewing your policy — they’ll want to know when the new policy starts and when you’d like your current policy to end. To safeguard against any lapses in coverage, you may want to play it safe and choose an end date that potentially overlaps with your next policy’s start date.

Also keep in mind that, since your insurance is being paid through an escrow account, you’ll want to notify your lender when you have a start date for the new policy so they know to stop making payments to your old insurer. However, the new insurance company may contact your lender on your behalf, and most of the cancellation and proof of insurance work is done by the insurer and your mortgage company.

What the insurance company needs to do

Once you cancel your old policy, the insurance company may send both you and your mortgage company a cancellation notice confirming an end date to your policy. If it was a paid-in-full policy and you cancelled it before renewal, the insurance company will issue you a refund check for the prorated amount.

When you set up a new policy, the new insurer will send your mortgage company a proof of insurance, and that usually includes the policy declarations page as well as evidence of insurance, which is basically a legal form stating that the policy is in force from a specified start to end date.

What the mortgage company needs to do

Once you’ve officially switched policies and you have a start date, the bank will then update your escrow account with your new policy information and pay your insurance.

Keep in mind that during this time, your escrow account may incur a shortage, or maybe you’ll have an overage, so your monthly mortgage payments may fluctuate based on your account standing.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.