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How to change homeowners insurance in escrow
When changing homeowners insurance that is paid through an escrow account, inform your mortgage servicer so that your escrow funds are paying your new policy premiums.
Updated June 4, 2020
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To keep your homeowners insurance policy active, or in force, you pay monthly or annual 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, while the rest goes toward your escrow account, 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 it’s not required.
Escrow accounts make home insurance payments a pretty hands-off process for homeowners, but the thought of changing insurance when it’s being paid through an escrow account may seem daunting. However, the process of changing policies, even when payments are being made through an escrow account, is fairly simple.
Your escrow account pays your property taxes, private mortgage insurance, and home insurance
If you make a down payment of less than 20%, your lender may require an escrow account
Switching homeowners insurance when you have an escrow account is fairly easy
If you change homeowners insurance that’s paid through escrow, notify your lender
An escrow account is where your lender deposits a portion of your mortgage payment to pay for property taxes, private mortgage insurance, and homeowners insurance. 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. That means 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 and 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.
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.
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Switching homeowners insurance that is paid through an escrow account isn’t any harder than if you were paying for insurance directly, but there are a few more variables to consider. Take the following policy switch example:
You switch insurance companies six months into a $1,000 annual policy term and the policy you switched to is considerably cheaper
Your last policy has already been paid in full — but luckily, insurance terms are prorated
Since you only lasted half your $1,000 policy term, you’d be issued a $500 refund check
Your insurance company will give you the option of either putting the funds into your escrow account or pocketing the refund
If you’re thinking about switching to a new company, you should also have an understanding of what each involved party — you, the insurance company, and the lender — need to do to get your new insurance up and running.
When re-shopping your homeowners insurance, you’ll want to have your current 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 a 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 overlaps with your next policy’s start date.
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 canceled it before renewal, the insurance company will issue you a refund check for the prorated amount.
Meanwhile, your new insurer will send your mortgage company proof of insurance, which may include the policy declarations page or an insurance binder, which is a legal document stating that the policy is in force from a specified start to end date.
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.
Once you’ve officially switched policies and you have a start date, the bank will 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.
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.
Canceling your old policy in the middle of its term and getting a new policy generally doesn’t cost you any added fees. On the rare occasion, insurance companies may charge you a cancellation fee for a small amount, like $25.
Your mortgage company may also 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.
Keep in mind that 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 contrary, your new policy may cost you more than your old policy. If that's the case and you cancel your old policy early, check with your mortgage company to see if your account has enough funds to avoid a shortage.
Pat Howard is a homeowners insurance editor at Policygenius in New York City. He has written extensively about home insurance cost, coverage, and companies since 2018, and his insights have been featured on Investopedia, Lifehacker, MSN, Zola, HerMoney, and Property Casualty 360.
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