Changing homeowners insurance in escrow: a guide
If you own a home, chances are you are financing your mortgage, property tax and homeowners insurance through an escrow account. But what happens if you want to switch homeowners insurance companies? Changing homeowners insurance options through escrow is easier than it sounds. Read on to understand the five steps you must take to change your homeowners insurance through escrow.
What is an escrow account?
When you buy a home, it’s likely that you will make monthly payments through a mortgage rather than paying for the cost of the home upfront. If you put a down payment of less than 20% of the home’s selling price down upon signing, your lender may require you to set up an escrow account. Under escrow, you make a single monthly payment to your lender and this payment covers your mortgage, homeowners insurance premium and various obligations like property taxes, private mortgage insurance and other administrative fees that may accrue through these services.
If you have financed your home through escrow, you are required to hold an active homeowners insurance policy. If you look at your escrow statements, it is clearly defined what portion of your payments is going towards your mortgage and how much is going towards escrow payments. Each year, your statement will explain increases in property tax and home insurance in what is called an escrow review statement. If you are unhappy with your rate increases and wish to switch companies, you are allowed to shop around for better rates and proceed accordingly.
Having a third party handle the finances associated with your home makes many people assume it is difficult to make changes — in reality, escrows have come a long way and switching policies is relatively simple.
Let’s review the steps required to adjust your homeowners policy in escrow.
Changing your homeowners insurance policy in escrow
Switching your homeowners insurance policy in escrow is very similar to the process you would follow if you were to be paying directly, only in this case you must consider an extra party. You, your mortgage lender and your insurance company each need to take a few actions in order to make the switch.
Step 1: Gather necessary information
It’s important to know the key aspects of your current insurance policy and your mortgage information before shopping around with other insurance providers. In addition to the information below, be sure to check if canceling your current policy will cost you a cancellation fee. On the rare occasion your carrier charges you a fee for early cancellation, continue shopping and set your new policy to activate on the expiration date of your current one.
Before getting started on switching your home insurance during escrow, gather the following documents:
- Your current policy information: To ensure you compare apples to apples, have your home insurance coverage details, limits and deductible amounts on hand. This will help you during the quote process to be certain your home is protected under the same terms.
- Your mortgage information: The new insurance company will need your mortgage account information in order to set up a new policy.
Step 2: Shop around for lower rates
Now it’s time to compare options from different insurance companies to find lower rates for your homeowners policy. The Zebra recommends comparing home insurance rates from at least three insurance companies, and you can do so quickly and easily through The Zebra's home insurance quote comparison tool. After you’ve gathered and submitted your information, you can see what a similar policy might look like with another insurance company. Be sure to check out each insurance provider’s perks, discounts and additional coverage options to see if you qualify for extra benefits not offered by your previous company. If you’ve made significant improvements to your property since last applying for a homeowners insurance policy, you may qualify for discounts.
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Step 3: Make the switch
Once you’ve selected a new insurance company, it’s time to pay your premium and start your new policy. Make sure the start date of the new policy is on or before the expiration date of your old one in order to avoid a lapse in coverage. When the new policy is activated, you may contact your previous insurer to cancel your old policy or notify them that you will not be renewing for the next term. If you paid for your old homeowners insurance policy in full before you completed the policy term, you will be issued a refund check for unused premiums.
Step 4: Inform your lender of the change
This could serve as step three if you want to give your lender a heads up that you are interested in switching insurance providers. If you speak to your lender before making the change, they may advise you on how to best determine adequate coverage from your new provider and give you an idea of what to expect throughout the switching process.
If you choose to notify your lender after the change has been made, that’s okay too. The mortgage lender will need to know the start date of your new homeowners insurance so they can stop making payments to your old insurer on the appropriate date. Everything else will be handled through the new insurer, as they will contact your mortgage company to send them your declarations page. The old insurance company will also officially notify them of the cancellation.
Step 5: Leave the rest up to the companies
If you’ve switched to a homeowners insurance policy with a different rate, your lender will adjust finances accordingly. Any excess monies in your escrow account will either result in a surplus check at the end of the term or go towards future premiums. For additional information, speak with your lender to understand any fluctuations in mortgage premiums.
What else could happen if I change homeowners policies in escrow?
Whether you wish to leave your current insurer for a cheaper policy or because you are unhappy with its services, chances are the new company’s annual premium won't be exactly the same as what you were paying before.
It is also possible that your old company will charge an early cancellation fee — usually no more than $25 — or that your lender will charge a processing fee to recalculate your account if your insurance premiums changed (most large banks don’t charge for this). Regardless of extra fees, everything can easily be taken care of through your mortgage company and the insurer.
It’s also important to note that when you have an escrow account, it may cost you more to go through this than if you were paying out-of-pocket. This is because escrows often pad your account with additional funds to prevent your account from a shortage in the event of a tax or insurance increase. While this means you pay more into escrow than what you actually owe, this cushion could come in handy if changing your homeowners insurance company incurs more fees than expected.
Bundled your homeowners insurance policy?
If your previous homeowners policy was part of a bundle, you may be concerned about switching companies. There are two ways to navigate the shopping process when your home insurance is part of a bundle:
- Shop for a new bundle with each of your insurance products included
- Find out exactly how much the homeowners insurance portion of your bundle costs and compare that rate to standalone homeowners policies from other companies
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About The Zebra
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