How does homeowners insurance escrow work?

An escrow account is where your lender deposits a portion of your monthly mortgage payment to pay for property taxes, private mortgage insurance, and homeowners insurance.

Pat Howard 1600Jennifer Gimbel

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Pat Howard

Pat Howard

Managing Editor & Licensed Home Insurance Expert

Pat Howard is a managing editor and licensed home insurance expert at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

&Jennifer Gimbel

Jennifer Gimbel

Senior Managing Editor & Home Insurance Expert

Jennifer Gimbel is a senior managing editor and home insurance expert at Policygenius, where she oversees our homeowners insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

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Ian Bloom, CFP®, RLP®

Ian Bloom, CFP®, RLP®

Certified Financial Planner

Ian Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.

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Key takeaways

  • Many mortgage lenders require you to set up an escrow account if you put down less than 20% for a down payment.

  • The escrow account ensures your property taxes, PMI, and home insurance are paid on time each month.

  • Your mortgage lender might let you cancel your escrow account after one or two years of on-time payments.

  • But you can still switch home insurance companies with an escrow account at any time.

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What is a homeowners insurance escrow account?

An escrow account is where your lender deposits a portion of your monthly mortgage payment to pay for 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 rest is deposited into your escrow account. Your bill will clearly state how much of your payment is going toward paying off the house and how much is going into your escrow account.

Let’s take a look at an example.

Say you have $2,000 mortgage bill that includes a mortgage payment and payment into your escrow account. 

  • $1,500 of the bill goes toward paying the principal and interest on your home loan 

  • $500 of the bill is your escrow payment that goes toward paying a portion of what you owe in insurance and property taxes for the year

Do I have to pay my homeowners insurance through escrow?

Mortgage lenders often require escrow accounts for insurance and property taxes if your down payment is less than 20% of the home’s sale price. If a year or two passes and your account is in good standing with no missed payments, you may be able to get rid of your escrow account via an escrow waiver or cancellation form provided by your lender.

Will my escrow payment decrease if I find cheaper home insurance?

Your escrow payment would likely decrease if you find cheaper home insurance elsewhere. But it all depends on the timing of when you switch companies. 

Let’s take a look at an example. 

Say you find cheaper home insurance, but at the same time your property taxes are set to increase for the following year. That means you might not have a lower escrow payment, since your higher taxes offsets what you’re saving on home insurance.

In either event, your lender will conduct a yearly escrow review and adjust your escrow payment based on your insurance and property tax rate changes. Your lender may then send you an escrow review statement that explains the changes to your insurance and taxes.

How do you change homeowners insurance with an escrow account?

Changing homeowners insurance providers with 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 example:

  • You change insurance companies six months into a $1,000 annual policy term and the policy you switched to is considerably cheaper.

  • Premiums on your now canceled policy were paid up front for the year — but luckily, homeowners insurance is prorated, so you’re owed a $500 refund by your old insurance company.

  • Depending on the specifics of your mortgage contract, you may have the option of putting the refunded policy premiums back 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 everyone involved — you, your insurance company, and your mortgage lender — need to do to get your new policy up and running.

How to change homeowners insurance with escrow

  1. Gather information about your home and current policy

  2. Compare quotes from several companies

  3. Notify your mortgage lender of the switch

  4. Finalize your new policy and cancel your old one

  5. Let your mortgage company do the rest

1. Gather information about your home and current policy

To save yourself some time during the application process, make sure to gather information about your home, like its square footage and heating type, and grab your current policy’s declarations page so you’re able to provide coverage limits for a quote estimate. 

2. Compare quotes from several companies

Be sure to compare quotes from at least three different insurance companies. Getting quotes from multiple companies gives you the opportunity to size up each company and policy option and provide a sufficient comparison against your current home insurance. 

Our Policygenius agents can help you compare quotes with multiple top companies, cancel your old policy, and get your new policy set up with your lender and escrow account.

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3. Notify your mortgage lender of the switch

Since your insurance is being paid through an escrow account, you’ll want to notify your lender of the switch so they can direct the escrow company to stop making payments to your old insurer. It’s also possible that your new insurance company will contact your lender on your behalf.

4. Finalize your new policy and cancel your old one 

As soon as you finalize your new homeowners insurance and have an official start date, contact your current insurer so they can set a cancellation date on your current policy. To safeguard against any lapses in coverage or uninsured property damage, make sure your current policy’s cancellation date is the same day as your new policy’s effective 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 you paid your premiums for the year in full and you canceled it before the end of the policy term, the insurance company should issue you a refund check for any unused premiums.

5. Let your mortgage company do the rest

Once you’ve notified all interested parties of the switch, your lender will likely provide your insurance information to the escrow company so they can begin directing payments to your new insurer. 

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.

Your insurer will send you proof of coverage

Once you pay your first policy premium on your new policy, your insurance company will likely send your mortgage company your policy declarations page or an insurance binder, which is a document that provides evidence of coverage.

Does changing homeowners insurance cost any money?

No, regardless of whether you change your homeowners insurance at renewal or in the first couple months of your policy term, you shouldn’t incur any added fees. Some insurance companies may charge you a cancellation fee for a small amount, like $25, but even this is fairly rare.

One thing to keep in mind is banks often charge more than what you actually owe in insurance and taxes. They do this to prevent your account from shorting in the event of unexpected insurance and tax increases. For that reason, escrow payments are generally more expensive than paying your insurance or taxes directly.

By law, your bank can’t pad your account with more than two months of taxes and two months of insurance

If it's determined during your escrow review that your account has more than that, you’re entitled to a surplus check at the conclusion of the review period.

Ready to change homeowners insurance with escrow?

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Should I keep my homeowners insurance after I pay off my mortgage?

Financial and insurance experts recommend you keep your home insurance policy even after you’ve paid off your mortgage and it’s no longer required. Home insurance provides crucial financial protection in case your home is damaged by a fire, hurricane, snow storm, tornado, or other catastrophe. Without home insurance, you’d be on the hook for paying to rebuild your home or replace your belongings out of pocket. 

Home insurance also protects you from expensive lawsuits and settlements in the event that you’re sued and found liable for damages. Without home insurance, all of your financial assets would be on the line in the event of a lawsuit.

Authors

Managing Editor & Licensed Home Insurance Expert

Pat Howard

Managing Editor & Licensed Home Insurance Expert

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Pat Howard is a managing editor and licensed home insurance expert at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

Senior Managing Editor & Home Insurance Expert

Jennifer Gimbel

Senior Managing Editor & Home Insurance Expert

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Jennifer Gimbel is a senior managing editor and home insurance expert at Policygenius, where she oversees our homeowners insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

Expert reviewer

Certified Financial Planner

Ian Bloom, CFP®, RLP®

Certified Financial Planner

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Ian Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.

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