The average monthly mortgage payment in the United States is $1,487, according to the U.S. Census Bureau’s 2019 American Housing Survey. Because most mortgages have an escrow account, that monthly mortgage payment likely includes a portion that is set aside for property taxes or homeowners insurance (and, in many cases, for both). This means that finding cheaper home insurance coverage could lower your monthly mortgage payment.
However, if you plan to change homeowners insurance companies and your mortgage includes an escrow account, you may want to take some additional steps when purchasing a new policy. Bankrate can help you understand how escrow accounts affect homeowners insurance policies and what you should know when changing insurance providers.
- It is relatively common for homeowners to pay their home insurance premiums from a mortgage escrow account.
- While you can change insurance companies if your home insurance is in escrow, you may need to take a few additional steps.
- If you receive a refund from your prior insurance company, it’s likely you should send it back to your escrow account to avoid a shortage.
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. Essentially, you pay for a month 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, and then your mortgage lender then makes a payment for the full amount to your home insurance company.
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. You need to make sure your mortgage lender knows which insurance company to send your payment to. Otherwise, your premium could go to the wrong carrier, your home insurance could lapse and your mortgage company could put force-placed insurance on your account. Don’t let this stop you from shopping around, though; you can still change carriers, you just need to be aware of the steps to take.
Step 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, 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.
Step 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 that all policy documents — including your renewal bills — will be sent to.
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 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 on file, so the mortgagee clause needs to be correct from the start to avoid confusion.
Step 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. An 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.
Step 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. Even if your new policy is effective in the future, it’s still a safer process to start the new policy before canceling your old one. That way, if there are any issues getting your new policy started, you still have coverage through your old policy.
Step 5: Notify your mortgage company
Your mortgage company should receive a cancellation notice from the prior insurer and a declaration 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 (which should be the same date to avoid a lapse), as well as the name of the new company and the policy number.
Step 6: Send any premium refunds to your new escrow account
You may receive a premium refund, depending on at what point in the policy cycle you cancel. If you switch companies at your renewal period, you won’t get a refund, as all of your annual premium has been used. However, if you switch companies midterm, you’ll likely get a pro-rated premium refund from your prior policy.
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 to rebuild your escrow amount.