Do I Have To Pay Homeowners Insurance Through Escrow?
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Your mortgage lender will usually require you to pay for homeowners insurance through your escrow account. This ensures you stay on top of your insurance premiums and maintain coverage throughout the loan term. If escrow is optional with your lender, creating an escrow account may be worth considering if you want to manage fewer bills and payment due dates.
Keep reading to find out how paying homeowners insurance through your mortgage escrow account works.
What Is a Mortgage Escrow Account?
Sometimes called an impound account, a mortgage escrow account is a financial account shared with your mortgage lender to pay various property-related expenses, like HOA fees, property taxes, mortgage insurance (if you buy it) and homeowners insurance.
Escrow accounts are mandatory for mortgage holders because lenders want to protect their investment if the home is damaged. Requiring homeowners insurance to be paid through escrow ensures your home is protected if damages in a fire, windstorm and many other perils.
After you repay the mortgage loan in full, you can close the escrow account but you will be responsible for staying on top of your own homeowners insurance.
How Does Escrow and Home Insurance Work?
The purpose of paying homeowners insurance through the escrow account is to ensure you maintain adequate homeowners insurance coverage throughout the loan term. Homeowners insurance paid through escrow ensures their investment is protected if the property suffers a loss from a covered peril, such as a fire, burglary or a burst pipe.
After signing the loan agreement with the mortgage company, the lender will create an escrow account. Depending on your lender, you may need to pay for a full one-year home insurance policy, which is added to your closing costs. Moving forward, a portion of your monthly mortgage payment gets deposited into this account and funds are withdrawn when your homeowners insurance payments are due.
Keep in mind that your lender may conduct an escrow analysis annually, which can change your monthly payments. For example, if the cost of home insurance is higher than previously analyzed, you can expect your monthly mortgage payment to increase.
Escrow is not always required and may be optional if your down payment is larger than 20%. If your down payment is sufficient, your lender may allow you to opt out of opening an escrow account by signing an escrow waiver. You would still be responsible for paying your homeowners insurance premiums and property taxes in a timely manner, however. If you do not, your lender may buy a policy on your behalf and add the cost to your monthly payments.
Opening an escrow account — even if optional — can offer convenience for homeowners that don’t want to sift through bills and manage multiple due dates. If your lender doesn’t require you to open an escrow account, you can still request to open one.
Pros and Cons: Paying Homeowners Insurance Through Escrow
Manage fewer bills and due dates
Manage more bills and due dates
Earn potential interest
Risk force-placed insurance if your coverage lapses
- Manage fewer bills and due dates: With an escrow account, you make monthly payments to your mortgage lender and they will stay on top of your property-related expenses, like property taxes and home insurance premiums. This eliminates the need to manage multiple bills and payment due dates.
- Earn potential interest: Some states, like Maine and California, allow homeowners to earn interest on the balance in their escrow accounts — similar to a conventional savings account.
- Manage more bills and due dates: Organization will be necessary if you opt out of an escrow account because you will need to manage multiple bills and calendar each payment’s due date. Enrolling in automatic payments (if your insurer offers it) can help avoid late payment fees and potential lapses in home insurance coverage.
- Risk force-placed insurance if your coverage lapses: If your home insurance coverage lapses because you were late on your insurance payments, your mortgage lender may purchase home insurance on your behalf. This type of policy is called force-placed insurance and is often more expensive than a standard home policy.
Can You Change Homeowners Insurance With an Escrow Account?
Switching home insurance carriers in the middle of your loan term is not only normal, we encourage it — but only if you want the cheapest price available while maintaining your coverage. Here are steps you can take to switch your homeowners insurance company with an escrow account.
Step 1: Shop Around
People generally shop around for a new homeowners insurance company for lower premiums or better service. You won’t realize you’re overpaying on home insurance until you compare rates from multiple insurers and see another carrier offering the same cover at a lower price.
When shopping around, you should also research available discounts that can further lower your costs. Many insurance carriers offer discounts for having a new home, bundling with another policy, upgrading your roof and installing security devices around your home.
Step 2: Purchase the New Policy
After choosing your new homeowners insurance carrier, you will need to schedule your coverage’s start date. Always schedule your new policy to begin either the same day as or before your current policy’s end date. Scheduling it even one day after your current policy’s end date will create a lapse in coverage, which often leads to higher insurance premiums.
Similar to buying the first policy, you will typically need to submit your mortgage company’s information since they will be billed for the policy.
Step 3: Cancel Your Old Policy
After purchasing your new policy, don’t forget to cancel your prior insurance policy. Do not cancel your policy until after the new policy is active or else you risk a lapse in coverage. Cancellation procedures vary by company but are usually done by phone, through your online portal or by mobile app.
Step 4: Notify Your Mortgage Lender of the Change
After successfully switching to a new homeowners insurance company, notify your mortgage lender. They may ask you for information about the new carrier, as they will likely be billed for the homeowners insurance policy.
After notifying your lender, the mortgage company will take over. The lender will be responsible for paying your home insurance premiums timely and you will continue making your monthly mortgage payments.
Step 5: Transfer Premium Refunds to Your New Escrow Account
If you’re switching to a new carrier mid-policy, then you may qualify for a prorated refund for the uninsured premiums and coverage. You should avoid spending this money or you may incur an escrow shortage. An escrow shortage occurs when the funds in your escrow account are not enough to cover the cost of homeowners insurance (or other property expenses).
If you don’t put the prorated refund back into your escrow account, there may not be enough funds available to pay for your new home insurance policy after switching. Depositing your prorated refund back into your escrow account can help you avoid this.
What Happens If My Mortgage Lender Doesn’t Pay My Homeowners Insurance?
If you’re making your monthly mortgage payments on time but notice your mortgage company missed a home insurance payment, notify your lender immediately. It is your lender’s responsibility to pay for property-related expenses plus late payment fees when you have an escrow account. Your lender should cover the outstanding balance promptly.
Worst case scenario, your home insurance company may cancel your policy if payment has not been issued after several days or weeks. Without home insurance, your property is vulnerable if a peril strikes, like a fire, windstorm or break-in. You may want to consult an attorney to explore available options if your mortgage company is non-responsive.
Escrow and Homeowners Insurance When Refinancing
Refinancing your home can have some implications on your escrow account and paying for your homeowners insurance policy. When refinancing with the same lender, your escrow account may remain open.
However, if you’re switching mortgage lenders, then your current escrow account will likely close and your lender will open a new escrow account. You should receive a refinance escrow refund, for the balance in your old escrow account, which you can put toward your new account. It’s best to include your homeowner insurance in the new escrow account.
Find homeowners insurance at the lowest price. Whether you have an escrow account or not, you’re in charge of finding the cheapest rates for reliable coverage on your new home. SmartFinancial analyzes multiple insurers in your area to match you with the perfect policy. Just enter your zip code below or call 855.214.2291 to receive your free homeowners insurance quotes.