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If you have an escrow account with your mortgage servicer, changing homeowners insurance carriers requires a few more steps than if you didn’t have an escrow account.
These steps aren’t hard, but they’re important to be aware of and follow to make sure you don’t experience a lapse in coverage.
Here’s what you need to know about changing home insurance when you have an escrow account:
How does home insurance escrow work?
When you have an escrow account, you pay a portion of your annual homeowners insurance and property tax bills with each monthly mortgage payment. Upon receiving your payment, your lender credits the principal and interest to your home loan and sets aside the rest in a separate account — your escrow account.
When your property tax and homeowners insurance bills are due each year, both you and your lender should get copies of those bills. Your lender will then use the money in your escrow account to pay those bills when they’re due.
Each year, your lender should analyze the balance in your escrow account to make sure it’s neither too high nor too low. Your escrow account balance might have a shortfall or a surplus:
- If your account has a shortfall: Your monthly mortgage payments will increase. A common reason for a shortfall is an increase in your property taxes or homeowners insurance premiums. Another is that you don’t have a cushion of two months’ worth of tax and insurance payments.
- If your account has a surplus: Your monthly mortgage payments may decrease, and your lender may return the excess to you. This might happen if your property taxes or homeowners insurance premiums go down.
How to change homeowners insurance with an escrow account
When you don’t pay your homeowners insurance premiums directly, changing carriers is a more involved process. Here’s how it generally works:
1. Choose a new carrier
Your homeowners insurance carrier will usually renew your policy each year without you having to do anything.
If you’re not sure whether you’re getting the best pricing and coverage for your situation, you might want to compare home insurance options a month or two before your existing policy expires — though you can change insurers at any time.
Learn More: How to Change Homeowners Insurance
Before you switch carriers, consider telling your existing carrier what you’re looking for and ask if it can meet your needs. It may be able to offer you a more comprehensive policy, endorsements to bolster your policy, or different deductibles and premiums that better fit your budget.
If you decide to change carriers after doing your research, here’s what needs to happen next:
2. Confirm the mortgagee clause
The mortgagee clause is the section of your homeowners insurance declarations page that says who your insurer should make the check out to — in addition to you — if they pay a claim for a covered loss. It might be labeled as “additional insured” or “additional loss payee.” It should have your mortgage servicer’s name and address.
Contact your mortgage servicer to make sure the mortgagee clause in your existing homeowners policy is correct. If not, get the correct information. You’ll need to give it to your new home insurance provider.
It’s also a good idea to ask your servicer how much homeowners insurance you’re required to carry so you can make sure your new policy’s limit is high enough.
You may want more coverage than your servicer requires. The insurer can give you an estimate of the cost to rebuild your home to make sure you have enough dwelling coverage. If labor and material costs have increased or you’ve improved your home, you may need a higher policy limit.
Check Out: How Much Homeowners Insurance Do I Need?
3. Purchase a new policy and notify your mortgage servicer
Once you’ve chosen your new homeowners insurance carrier, you’ll need to notify your mortgage servicer so they can pay the premium from your escrow account.
Send your servicer your new declarations page. Include a note explaining that you’re switching insurers. Be sure to provide your name, loan number, and property address. Your new insurer may actually handle this process for you.
If not, contact your servicer to find out where to send the declarations page. Wait for your new carrier to notify you that it’s received payment. Follow up with your mortgage servicer if the process seems to be going too slowly.
4. Cancel your old policy
Once your new policy is effective, you can cancel your old policy. Don’t cancel your old policy until you’re certain your new policy is active. You don’t want to be without homeowners insurance for any amount of time.
If your old insurer sends you a refund, you may need to make an additional payment to your mortgage servicer so your escrow account isn’t underfunded.
Here the answers to some of the most commonly asked questions about changing homeowners insurance when you have an escrow account.
How much does it cost to change homeowners insurance?
If you’re changing insurance carriers before your existing policy expires, you might pay a small cancellation fee. If your new policy is more expensive than your old one, your monthly mortgage payment will increase. Your mortgage servicer will need to collect more each month to cover your higher premium.
If your new policy is less expensive, your mortgage payment may go down.
Do I need an escrow account?
Your mortgage servicer may require you to have an escrow account if you don’t have at least 20% equity in your home. Certain types of mortgages — like an FHA or VA loan, for instance — also generally require it.