If your home insurance is paid through an escrow account and you want to change insurance companies, don’t hesitate just because there might be a little more paperwork involved. Switching your home insurance company in an escrow account is a simple process. You’ll just need to take a few simple extra steps to get your insurance company and your mortgage lender on the same page. Bankrate’s guide on how to change your home insurance in escrow can help you figure out the proper process.
How Escrow Homeowners Insurance Works
If you have a mortgage escrow account, a portion of your monthly mortgage payment will be used to cover other expenses like home insurance premiums and property taxes. Essentially, you pay one month’s worth of your annual home insurance premium to your mortgage company every month. That amount is kept in an escrow account. The money accumulates until your mortgage lender pays the home insurance company in full when your policy comes up for renewal.
Example of home insurance with escrow account
You buy a home worth $300,000 and put 20 percent down. You take out a 30-year mortgage at 7 percent to cover the remaining purchase cost. Based on annual homeowner insurance premiums of $2,151, your monthly mortgage payments would be:
- Property Tax: $198
- Interest and principal payments: $1,597
- Home Insurance: $179
- Total monthly payment: $1,974
Each month, you pay your mortgage company a total of $1,974, and the mortgage company puts money from those payments into an escrow account to cover your property taxes and homeowner’s insurance. In most cases, the mortgage company manages the escrow account, but it may be managed by another trusted third party. Homeowners rarely manage the account. The organization that manages the escrow account receives the funds and makes regular payments to your local government for property taxes and to your insurance company for homeowners insurance.
If you make less than a 20 percent down payment, you’ll also be required to pay private mortgage insurance (PMI) until your loan balance reaches 20 percent. These PMI payments are included in your monthly mortgage payment and transferred to an escrow account.
If you want to change your home insurance in an escrow account
If you have a mortgage and you pay your home insurance premium in an escrow account, switching insurance companies can be a little more complicated than if you own the home outright. But you still have the right to choose your insurance company. Mortgage lenders can’t force you to use a particular insurance company. Here are some scenarios in which you should consider transferring your home insurance to a new insurance company, even if you have an escrow account:
- If you want to find cheaper insurance: If you’re looking for cheap home insurance, a good strategy is to shop around for insurance companies. Because premiums affect the amount you pay into your escrow account each month, choosing a cheaper policy could result in lower mortgage payments when the insurance company performs an escrow analysis.
- If you are refinancing: Refinancing your mortgage may be a good opportunity to see if you can find a cheaper home insurance company that can further reduce your monthly costs. You don’t have to change insurance companies when you refinance your mortgage, but it may be a good opportunity to see what other insurance companies are available.
- Needs have changed: If you start a home-based business, buy a particular breed of dog, make certain changes to your home, or experience a life event such as getting married or having a baby, you may need a specialized type of coverage that your current insurer doesn’t offer. Shopping around for a new home insurance company may help you get a policy that meets your new needs.
- I had a bad service experience: If you are not satisfied with the service provided by your current insurance company, it may be time to comparison shop insurance companies. Service is an important part of the insurance experience, and you want to find an insurance company you can trust.
read more: Best Home Insurance Companies
How to change your homeowners insurance policy with an escrow account
Paying your home insurance premiums through escrow is convenient, but it can be a bit of a pain if you want to change insurance companies. You need to make sure your mortgage lender knows which insurance company to send your payment to; otherwise, your premiums could be paid to the wrong insurance company and your home insurance coverage could lapse. You and your insurance agent can rectify the situation, but if you end up with an escrow shortfall, your mortgage payments could increase significantly over the next 12 months. Don’t let this stop you from comparison shopping, though; you can change insurance companies, but you need to know the steps involved.
1. Find and choose a new career
If you want to change homeowners insurance companies, the first step is to compare. Understand your coverage, your budget, and the features you want (like specific discounts or a mobile app), then research companies that might fit your situation. Once you’ve gotten quotes and selected a company, you can move on to the next step.
read more: How to Choose the Best Home Insurance Company
2. Check your lender’s mortgage terms
Before you buy your new insurance, you’ll need to know exactly what your mortgage lender will be listed as. This is called the mortgagee clause, and it will include the lender’s legal name and address where all insurance documents, including renewal invoices, will be sent.
Not only will your mortgage insurance policy include the lender’s name and address for sending your monthly payments, but most companies also have a unique address for your insurance documents. To be sure your new insurance policy has the correct information, call your mortgage company to verify. Then, communicate the information to your new insurance company before you purchase your new policy.
Purchasing insurance often automatically generates documents that are sent to mortgagees of record, so the mortgagee clauses must be correct from the start to avoid confusion and potential lapses in insurance.
3. Buy new insurance
Once you know the mortgagee clauses in your new policy are correct, you can proceed with the purchase of your new insurance. Your agent or company representative will walk you through the process, and you will probably have to sign an application and other necessary documents related to your coverage. You will pay the premium in escrow, so you will not have to pay anything out of pocket. Your new insurance company will send an invoice to your mortgage company.
4. Cancel your previous policy
Once you’ve purchased your new insurance, contact your current home insurance company to cancel your previous insurance on the date your new insurance goes into effect. Keeping the dates the same will help prevent any overlaps or gaps in coverage. Even if your new insurance goes into effect in the future, it’s safer to start your new insurance before canceling your old insurance. That way, if you have any issues starting your new insurance, you’ll still be covered through your old insurance.
5. Notify your mortgage company
Your mortgage company should receive a cancellation notice from your old insurer and a statement from your new insurer, but letting them know you’ve changed insurers will help avoid any confusion. You’ll need to provide them with the cancellation date of your old insurance and the effective date of your new insurance (which must be the same date to avoid lapses), the name of your new company, and your policy number.
6. Transfer your insurance refund to the new escrow account
If you change insurers during your policy term, you may be able to get a pro-rata refund of your premium from your previous insurer. If you change insurers during a renewal period, you will not be able to get a refund as your entire annual premium has been used.
Typically, you’ll need to contact your mortgage company to find out how to return this money to your escrow account. You can choose to keep the money, but doing so could result in a shortfall in your escrow balance and you may have to make up your monthly mortgage payments higher to make up the escrow amount.
