Navigating Escrow Insurance Adjustments: A Step-By-Step Guide

Changing escrow insurance is a relatively simple process, but it's important to ensure it's done correctly to prevent a lapse in coverage. An escrow account is a way for your mortgage lender to hold funds to pay off your property tax, homeowners insurance and other required payments on a monthly basis. The process of changing insurance providers with an escrow account is very similar to switching insurance without one, with a few additional steps. Firstly, gather information about your home and current policy, then compare quotes from several companies. Next, notify your mortgage lender of the switch and finalise your new policy before cancelling your old one. Finally, let your mortgage company do the rest.

Understand the escrow account

An escrow account is a financial instrument, typically a savings account, that is maintained by a neutral third party on behalf of two other parties engaged in a financial transaction. In the context of homeownership, escrow accounts are used to hold funds for property tax, homeowners insurance, and other required payments on a monthly basis. The escrow account is managed by the mortgage lender or servicer, who deposits a portion of the monthly mortgage payment into the account to cover these expenses.

Here's how it works: when you make your monthly mortgage payment, a portion of it goes towards your principal and interest, while the rest is deposited into your escrow account. The money in the escrow account is then used to pay your property taxes, homeowners insurance, and other required payments when they become due. This helps to ensure that these bills are paid in full and on time, providing peace of mind for homeowners.

The benefits of having an escrow account include automated payments, potential discounts from the lender, and protection from fluctuations in prices. Additionally, homeowners receive yearly escrow reports, so they know where their money is going. It also eliminates the risk of missing a payment or incurring late fees since the process is automated.

However, there are also some drawbacks to using an escrow account. One of the cons is that homeowners may have to make large upfront payments when starting an escrow account. Additionally, escrow accounts can be difficult to get rid of if the homeowner decides they want to go back to making monthly payments on their own. There is also an increased risk of being targeted by scammers due to the large sums of money held in escrow accounts.

Overall, an escrow account can be a convenient way to manage the financial aspects of homeownership, but it's important to understand the pros and cons before deciding whether to use one.

Research new insurance providers

Researching new insurance providers is an important step in changing your homeowners insurance when it's paid through escrow. Here are some detailed steps to guide you through the process:

Understand Your Coverage Needs and Budget:

Before starting your research, it's crucial to have a clear understanding of your coverage needs, budget, and any specific features you're looking for in a new insurance provider. Identify the types of coverage you require, such as additional coverage for a home business or certain discounts you want to take advantage of. Knowing your budget will help you narrow down your options and find providers that fit within your financial plan.

Gather Information About Your Current Policy and Mortgage:

Collect relevant information about your current insurance policy, including coverage limits, deductible amounts, and annual premiums. This information will be essential when comparing quotes from different providers. Additionally, gather details about your mortgage, as the new insurance company will need this information to set up a new policy.

Compare Quotes from Multiple Companies:

Shop around and compare quotes from at least three different insurance companies. Utilize online tools and platforms that allow you to get quotes from multiple providers at once. During this step, pay close attention to the coverage options, perks, discounts, and additional benefits offered by each company. Remember that modern insurance carriers are increasingly offering customizable coverage options and incentives for signing up, so explore these opportunities thoroughly.

Research Customer Service and Reviews:

When researching new insurance providers, don't underestimate the importance of customer service and reviews. You want to choose a company with a responsive customer support team that has a solid reputation for handling claims and inquiries efficiently and effectively. Look for companies with great reviews and state-of-the-art technology to ensure a smooth and hassle-free experience.

Understand the Switch Process:

Before making a final decision, take the time to understand the steps involved in switching insurance providers. Most companies will handle the switch for you, but it's good to be aware of any specific requirements or procedures they may have. Additionally, confirm if there are any cancellation fees associated with ending your current policy and factor that into your decision.

Contact Your Mortgage Lender:

Before finalizing your new policy, it's crucial to confirm the correct mortgagee clause with your mortgage lender. This includes their official name and the unique address where insurance documents will be sent. Relay this information to your chosen new insurance provider to ensure a smooth transition and avoid any confusion or delays.

Remember, changing your homeowners insurance when it's paid through escrow primarily involves understanding your needs, conducting thorough research, and following the necessary steps to ensure a seamless transition. Taking the time to explore your options and make an informed decision will help you find the best insurance provider to suit your specific needs and budget.

Notify your mortgage lender

You don't have to tell your mortgage lender before changing insurance providers, but it's a good idea to. Letting them know in advance will help you understand what to expect from the process and help you avoid inadequate coverage. Your mortgage company wants to be sure that your new policy will pay to replace your home if it's completely destroyed.

If you change homeowners insurance without notifying your mortgage lender, send them a copy of the new declarations page and written notice that you canceled the old policy as soon as possible.

Your 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. The old insurance company will also officially notify them of the cancellation.

If you receive a refund check from your previous insurer, you may need to send that amount to your mortgage lender, and they'll deposit it in your escrow account. If you fail to do this, your escrow account may be underfunded.

Your mortgage lender should receive a cancellation notice from the prior insurer and a declarations page from the new insurer, but it can help to avoid confusion to let your mortgage company know that you've switched insurance providers. You'll likely need to provide the cancellation date of the prior policy and the effective date of the new policy (which should be the same date to avoid a lapse), as well as the name of the new company and the policy number.

Finalise your new policy

Finalising your new policy is a crucial step in the process of changing your homeowners insurance when it's paid through an escrow account. Here are some detailed instructions to help you through it:

Once you've selected a new insurance company with a policy that meets your needs and budget, it's time to finalise the new policy. Make sure you understand the terms and conditions of the policy, including the coverage limits, deductibles, and any exclusions or add-ons. Review the policy documents carefully and clarify any doubts you may have with the insurance provider.

Before finalising, double-check that the mortgagee clause is correct. This includes your lender's official name and the address to which all policy-related documents will be sent. It's important to confirm this information with your mortgage company to avoid any confusion or delays in processing.

When you're ready, proceed to sign the necessary documents and finalise the purchase of your new policy. An agent or representative from the insurance company will guide you through the process, which may include signing an application and any other required forms related to your coverage. Remember, since you're paying through escrow, you won't need to make an immediate payment out of pocket. The insurance company will send the bill directly to your mortgage lender.

Cancel your previous policy

After finalising your new policy, it's essential to contact your previous home insurance provider to cancel your old policy. Ensure that the cancellation date of the old policy and the effective date of the new policy are the same to prevent any gaps or overlaps in coverage. Even if your new policy starts at a future date, it's safer to keep the old policy active until the new one begins. This way, you'll have continuous coverage in case there are any issues with starting the new policy.

When you cancel your old policy, you may receive a prorated premium refund if you paid for the full year and are cancelling before the end of the policy term. Contact your mortgage company to determine how to handle this refund. Returning the refund to your escrow account can help prevent a shortage and avoid higher monthly mortgage payments to rebuild your escrow amount.

Cancel your old policy

Cancelling your old insurance policy is a crucial step in the process of changing your homeowners insurance. Here are some detailed steps to guide you through the cancellation process:

Step 1: Understand Your Current Policy

Before initiating the cancellation, it is essential to review your current policy. Familiarise yourself with the terms, conditions, and any applicable fees. Check for early cancellation fees and, if possible, try to schedule the switch for the policy's renewal date to avoid these fees. Knowing your current coverage, deductible, and annual premium will also help you compare similar policies and make an informed decision.

Step 2: Notify Your Mortgage Lender

Informing your mortgage lender about your intention to switch insurance providers is a recommended step. Giving them a heads-up will ensure a seamless transition and help you understand what to expect from the process. They can also advise you on ensuring adequate coverage from your new provider. If you choose to notify them after the switch, make sure to provide the start date of the new policy to avoid a lapse in coverage.

Step 3: Finalise Your New Policy

Before cancelling your old policy, it is crucial to finalise and purchase your new insurance policy. Ensure that the new policy is set in stone and provides the coverage you need. Choose an official start date for the new policy, and if possible, schedule it to be the same day as the cancellation of the old policy to avoid any gaps or overlaps in coverage.

Step 4: Cancel Your Old Policy

Once your new policy is in place, contact your current insurance provider to cancel your old policy. Provide them with the necessary details, including the effective date of cancellation, which should ideally be the same as the start date of the new policy. Remember to confirm the cancellation and obtain any necessary documentation or confirmation from your previous insurer.

Step 5: Handle Premium Refunds

If you have paid your premiums for the year in full and cancel your policy before the end of the term, you may receive a premium refund for the unused portion. In such cases, it is essential to send this refund back to your escrow account to avoid a shortage. Contact your mortgage company to determine the best way to handle this refund and ensure your escrow account remains adequately funded.

Step 6: Update Your Records

After cancelling your old policy, update your records accordingly. Ensure that all the necessary parties, including your mortgage lender and insurance providers (old and new), are aware of the changes. Keep track of the effective dates, cancellation dates, and any other relevant information. This will help you stay organised and avoid any confusion or overlap in coverage.

Remember, while changing your homeowners insurance with an escrow account may seem daunting, it is a manageable process if you follow these steps and stay organised. Don't hesitate to reach out to your mortgage lender and insurance providers for guidance and clarification throughout the process.

Frequently asked questions