A Guide to Changing Homeowners Insurance With Escrow

When you’re considering switching your homeowners insurance with an escrow account, there are several factors to consider. In addition to price, it’s imperative to take a closer look at your declarations page to find where your current coverage might be lacking. Do you have upgrades that aren’t reflected in the total value of your home? Or are you a tech junkie that wants to make sure you have extra theft protection over your high-dollar gadgets?

Home insurance didn’t used to be so customizable. The more modern insurance carriers are changing that, offering extensive coverage for service lines, technology and other key items in your home. Many even have incentives for signing up, such as discounts on your premium. And more recently, providers (like us) are offering smart home kits for free when you make the switch. That’s why research is such an essential first step when switching insurance companies. But to keep things simple, below is a quick step-by-step guide to switching homeowners insurance with an escrow account.

Key takeaways:

• An escrow account is a way your mortgage lender holds funds to pay off your property tax, homeowners insurance and other required payments on a monthly basis.
• The only difference between changing homeowners insurance with an escrow account and changing insurance without one is how involved your mortgage lender is throughout the process. 
• Give your mortgage company ample notice before switching insurance providers so they have time to reroute funds.

What is an escrow account?

An escrow account is how your mortgage lender holds funds to pay off your property tax, homeowners insurance and other required payments every month. Think of it like an extra bank account used to set aside money for specific bills. But instead of controlling the bank account yourself, your lender takes care of collecting the funds from you and paying off these additional homeowner expenses.

Most mortgage lenders will require some sort of escrow account (no matter your type of home insurance policy) to make sure you have the funds available to make these payments, though that can change depending on how much you put down on your home. Generally, the more you put down on your home, the less likely it will be that your lender will require an escrow account for these purposes. 

Should I get an escrow account?

Deciding whether or not you should get an escrow account is up to you and your mortgage lender. Ultimately, you’ll need to decide if you prefer to make these monthly payments yourself or if you want to have that process automated. Each option has its pros and cons, and understanding these differences will help you make the best decision for your needs.

Pros of an escrow account include automated payments and potential discounts from your lender.

Pros of escrow accounts

In addition to the convenience of paying all your bills within one monthly mortgage payment, there are a variety of other pros to this payment option, such as:

• Some mortgage companies offer discounts for setting up an escrow account.
• You’ll be covered from fluctuations in price, as your lender will cover the difference and have you pay them back over time.
• You’ll be kept in the loop with yearly escrow reports, so you know where your money is going.
• You only have to make one monthly payment to your lender to cover your mortgage, taxes and home insurance.
• You won’t miss a payment or incur late fees since the process is automated.

Some of the cons of an escrow account are large upfront payments and an inability to take advantage of earned interest from a high-yield savings account.

Cons of escrow accounts

While the cons of escrow accounts are small, they are important to pay attention to (considering how hands-on you want to be with your finances):

• When beginning an escrow account, you have to pay for an entire year upfront.
• Since they are often required by your mortgage lender, they can be hard to get rid of, should you want to go back to making monthly payments on your own.
• You are more likely to be the target of scammers, given the large sums sitting in escrow accounts.
  • In 2018, the FBI reported over 11,000 cases of real estate fraud.
• You can’t take advantage of interest earned from putting these funds in a high-yield savings account.

How do you change homeowners insurance with an escrow account?

1. Review your current coverage.
   1. Look for any lapses in coverage and figure out what you’re looking for in your next policy. For more information on what to look for when reviewing your current coverage, check out our post on how to change home insurance.
2. Shop around.
   1. Compare quotes with similar coverage options from several companies and make sure to ask about any extra incentives (such as new customer discounts, deals on home repair or smart home devices) they can provide if you decide to make the switch.
3. Buy your new policy.
   1. It’s best to buy your new policy before canceling your old one. This ensures there are no gaps in coverage. Since you get to choose your effective date for the new policy, you can wait until your old policy ends (or just cancel it mid-contract).
4. Let your mortgage company know.
   1. This is where having an escrow account changes how you switch home insurance. While there aren’t any fees associated with switching, you need to give your mortgage company ample notice so they have time to reroute funds.
5. Cancel your existing policy.
   1. Once you know your new policy is set in stone, you can cancel your previous insurance policy without worry.
6. Check with your mortgage lender for any payment changes.
   1. While you’ll likely already have enough in escrow to cover upfront payments, if you don’t, your mortgage company may have to alter your monthly payments slightly to pay them back the difference.

Changing homeowners insurance with an escrow account is pretty similar to changing insurance without one. The only difference is how involved your mortgage lender is throughout the process. When you have an escrow account (or PMI), you can expect to keep in contact with your lender pretty closely.

Does changing home insurance providers with an escrow account cost anything?

Changing home insurance through escrow doesn’t cost anything because all your lender has to do is update where they send the funds they collect from you on a monthly basis. If you paid the full coverage amount upfront but end up canceling your policy before the end date, you’ll receive a refund check for that allotted time. However, you could face a small fee for canceling your previous policy before it ends; to find out when your policy began (and when it is scheduled to end), you can check your declaration page.

How do I get my money back from my old insurance provider with escrow?

As mentioned above, you should receive reimbursement if you paid for a full year of home insurance coverage and then canceled it mid-contract. This refund check will go directly to you, rather than your mortgage company, allowing you to use it as you see fit. If you are unsure how to best use the money, give your mortgage company a call. They’ll let you know where your current escrow account stands and if you should allocate some funds to escrow.

Escrow accounts can seem complicated on the surface, but in reality, they are just a way to provide extra financial protection for you and your mortgage lender. Contrary to many myths out there, changing home insurance with an escrow account is pretty simple. 

As long as you’ve found an insurance company that has a responsive customer service team, great reviews and state of the art technology, you should be set up for a headache-free mortgage.  Have additional questions about what to look for in a homeowners insurance provider? Contact us for all the help you’ll need.