How to switch homeowners insurance when your escrow pays your premium

Whether you’re a brand new homeowner or you’ve owned numerous homes, chances are that your escrow pays your home insurance premium. If you have an escrow account through your mortgage provider, your mortgage company takes a portion of each monthly payment you make throughout the year and puts it in the escrow account to pay for things like property taxes and homeowners insurance premiums. Then, when your annual homeowners premium is due, your lender cuts a check to the insurance company with the money from your escrow account to pay for your homeowners insurance coverage for the year ahead.

But while you might think you’re stuck with the same insurance carrier because of your policy premiums being paid through your escrow account, the truth is that you have the right to change homeowners insurance companies. It makes sense to switch in some cases, like when you want to refinance your home loan, find a cheaper rate on your homeowners insurance policy or secure a policy from a company with better customer service. And knowing how to switch homeowners insurance when escrow pays the premium can help make the switch easier.

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.

In September 2022, the average monthly mortgage payment was $1,941, according to the Mortgage Bankers Association. Mortgage rates are rising, which means that monthly payments will likely be higher. If you have an escrow account for your insurance and/or property taxes, you’ll have to take that into consideration when budgeting.

When you might want to change home insurance with an escrow account

If you have an escrow account, switching home insurance companies can be a bit more complex than if you owned your home in full. It’s always your choice to find the best home insurance company for you, though; a mortgage lender can’t require you to insure your home with any specific company. Here are some scenarios when you might want to consider moving your home policy to a new insurance company, even if you have an escrow account:

  • You want to find a cheaper policy: If you’re looking for cheap home insurance, shopping around is a good strategy that allows you to compare rates. If you find a cheaper policy that still fits your needs, you might want to consider changing companies. Because your insurance premium affects how much you pay into your escrow account each month, a cheaper policy could result in a lower mortgage payment when your company does its escrow analysis.
  • You’re refinancing: Refinancing could provide a good opportunity to see if you can find a cheaper home insurer to help reduce your monthly costs even further. You don’t have to change insurance companies if you’re refinancing, but it could provide a good opportunity to see what else is out there.
  • Your needs have changed: If you’ve started a home business, purchased a certain breed of dog, made specific changes to your home, or gone through a life event like a marriage or having a baby, you may find yourself in need of a specialized coverage type that your current insurer doesn’t offer. Looking for a new home insurance company may help you get a policy that fits your new needs.
  • You had a poor service experience: If you’re not happy with the service you’re receiving with your current insurer, you may want to shop around. Service is an important part of the insurance experience, and you want to make sure you find a carrier that you trust.

Remember that regardless of your escrow account status, you can always change insurance companies. We’ll show you how in six steps, below.

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 from your prior insurer, 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.

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