How you can change homeowners insurance with escrow

Your homeowners insurance needs can change over time. You may want to search for a less expensive policy or add certain types of coverage. Maybe you've switched insurance carriers or hopped to a policy with a lower premium.

Whatever the case, if you have a mortgage and want to switch insurance carriers, you'll need to let the lender know. If you’re wondering how to change homeowners insurance with escrow, we’ll lay out the steps from researching options, verifying your mortgagee clause, notifying your lender, and aligning start and end dates—plus what to expect with premiums, refunds, and your monthly payment.

How does homeowners insurance work with an escrow account?

If you're a homeowner, you know that lenders usually require homeowners insurance.  They often collect home insurance premiums through an escrow account. This is an account that lenders set up to pay housing-related expenses that can also include property taxes.

When your insurance premium is due, the mortgage servicer pays the insurance company directly from escrow. When the cost of your insurance goes up, the servicer will adjust the amount it collects from you for this policy so there are enough funds in the escrow account to cover the cost.

Escrow account overview

An escrow account holds funds for specific uses like insurance and property taxes.

Because money gets pulled from this account to pay for these expenses, you won't have to worry about a large bill several times a year from funds that come out of, say, a designated savings account.

Instead, the funds in escrow are used to pay for expenses each month. In turn, it can help you manage these large annual expenses by spreading payments throughout the year.

How to change homeowners insurance with an escrow account: 7 steps to follow

Without knowing where to start, changing homeowners insurance with an escrow can be confusing, no doubt. These steps can help demystify the process and keep things simple:

1. Do your research

When it comes to homeowners insurance, your mortgage servicer might have a minimum coverage amount you'll need to carry. If not, you'll want to decide on a policy that balances the cost and coverage. In most cases, the higher the insurance premium, the lower the deductible. Your coverage amounts also impact the cost of your insurance. The right policy should match your budget and provide adequate protection.

Be sure to carefully read the fine print of a policy and pay close attention to state-specific details. If you have any questions, speak to an insurance agent or rep to get clarification.

2. Choose an insurance company

To compare pricing and coverage, it's a good idea to get multiple quotes from a handful of insurance companies. Compare pricing for the same coverage, limits, and deductibles. That way, you're looking at apples against apples.

You'll also want to see if a policy covers a fixed-dollar amount or if it's a percentage of your home's insured value. It's also a good idea to check if the coverage is for actual cash value (ACV) or replacement cost value (RCV).  Each insurance company may calculate premiums differently, so shopping around can pay off.

3. Verify the mortgagee clause

The mortgagee clause is a provisional protective clause between the mortgagee (aka mortgage lender) and the property insurance provider. It's folded into the homeowner's insurance policy that ensures that should there be property damage to your home, any unpaid loan amount is paid for by ensuring part of the insurance proceeds goes to the lender.

The mortgagee clause also ensures the lender receives important changes to the insurance policy. You can call the lender directly to make sure you have the correct mailing address. Clarify that this clause ensures the lender receives important insurance updates.

4. Buy the new homeowners insurance policy

Once the mortgagee clause is verified, you're ready to purchase your new insurance policy. Some insurance companies require that you work with an agent, while others may let you make the changes or purchase a new policy through the company’s online platform.

Once the policy is paid through escrow, the insurance company will bill the lender. You'll want to pore over all the details and make sure the policy is accurate before finalizing it.

5. Cancel the old homeowners insurance policy

After you've purchased your new homeowners policy, you're one step closer! It's time to cancel your old homeowners insurance policy.

Be sure to schedule cancellation the same day as your new policy starts. That's because coverage gaps or overlaps in coverage can negatively impact mortgage compliance or lead to policy restrictions or a bump in premiums.

6. Get in touch with your mortgage lender

Once you've made the switch, it's a good idea to call your mortgage lender to make sure they indeed received the updated insurance documents.

This makes sure everything goes as planned and avoids potential escrow account issues or snags in processing your policy. While insurers usually send out notices, reaching out directly to the insurer can help you avoid confusion.

7. Deposit your premium refund

If you canceled your homeowners insurance coverage mid-term, you might receive a refund. This amount might be prorated and is the remainder of your policy. However, keeping the refund could lead to an escrow shortage and higher payments towards the escrow account.

Consider reaching out to the lender to see how you might be able to apply the refund to the escrow account. A bit of buffer couldn't hurt. The procedures for receiving a refund or applying what remains to your escrow can vary by lender. To avoid delays, reach out and confirm the next steps.

When should you change your homeowners insurance with your escrow account?

As switching your homeowners insurance does require time and extra steps, you'll want to make sure it's a good idea to do so. Here are some reasons why it could be a good idea to change your current policy to a new policy:

If you’re hoping to save some money

Changing homeowners insurance can be a smart move to reduce overall housing costs. Doing a bit of rate shopping from multiple providers can help you find a more affordable premium. This can lead to reduced monthly mortgage payments, especially when insurance is paid through escrow.

If you’re unhappy with the service

As homeowners insurance is an important type of coverage, you'll want to be a happy customer and get the support you need. If you've run across unresponsive agents, murky explanations of the details of your policy, a delay in claims processing, or lack of communication, you might want to switch providers.

If you’re looking for different coverage

Homeowners insurance isn’t one-size-fits-all, nor is it stagnant. Your needs might change. If the current insurer doesn't offer you the flexibility or options that you're seeking, it might be time to make the switch. Having coverage through a different company can be more aligned with your current needs.

Is changing homeowners insurance with an escrow account worth it?

To decide whether making the switch on your homeowners insurance is the right choice for you, you'll want to weigh the potential pluses against the minuses. Here are some of the pros versus the cons.

Pros

• Might get a lower premium.
• Could receive better customer service.
• May have access to more extensive or flexible coverage options.

Cons

• Need to spend time shopping around for a new provider.
• Must complete and submit paperwork to make the switch.
• Risk of a potential coverage gap if the transition isn’t timed properly.

FAQ

Here are some frequently asked questions about changing homeowners insurance with escrow:

Is homeowners insurance built into escrow?

In most cases, yes. Your lender generally includes homeowners insurance payments in your monthly escrow payment. This is usually along with your monthly mortgage payments and taxes.

Do you need to let your lender know you’re changing your homeowners insurance with your escrow account?

Yes, it's best to inform your lender directly to avoid confusion, even if your insurer notifies them. It's a good idea to make sure your lender receives the new policy and is informed of this switch.

The bottom line: Changing your homeowners insurance with escrow can be simple

While it can feel overwhelming, changing your homeowners insurance with escrow is usually straightforward. To make the switch, you'll need to choose a new carrier and new policy, purchase the insurance, inform your mortgage lender, and see about potentially getting a refund. Following these steps can make for a smooth process.

If you want to learn more, you can explore homeowner resources at Rocket Mortgage.