How to Change Homeowners Insurance with Escrow

Sometimes known as an impound account, escrow is a dedicated holding account that your mortgage lender uses to collect funds for property taxes, homeowners insurance premiums, and more. Many homebuyers are required to pay these expenses through escrow, depending on their home loan type and factors like their location and down payment amount. 

Since your lender pays your homeowners policy premiums through this account, there's an added level of complexity if you ever decide to change your coverage or even shop through another carrier. Here’s a look at how to change homeowners insurance with escrow and how that might impact your monthly mortgage payments.

Key takeaways

• Mortgage lenders are responsible for holding and maintaining escrow accounts for borrowers.
• These accounts are automatically funded through the homeowners’ monthly mortgage payments.
• Escrow accounts are generally required for government-backed mortgage loans or conventional loans with less than 20% equity.
• When certain home-related bills are due, such as property taxes or homeowners insurance premiums, the lender will pay them out of escrow funds.
• While you can change your homeowners insurance coverage at any time, it's important to note that doing so may also change your escrow (and, in turn, your monthly mortgage) payments.

What is an escrow account?

When it comes to home mortgages, an escrow account is a type of holding account used to set aside money for specific bills related to your home. This account, managed by your lender, holds funds for things beyond your mortgage loan’s principal and interest, such as your 

• property taxes
• homeowners insurance premiums
• other required payments 

Think of an escrow account as an extra savings account exclusively for your home. Rather than have you pay certain house-related bills directly, your lender opts to collect these funds from you as part of your required monthly mortgage payment. The lender then stores the money in a managed escrow account and pays the additional homeowner expenses when due. 

Most mortgage lenders will require some sort of escrow account to cover things like insurance premiums (no matter what type of homeowners insurance you have!). Escrow payments will help ensure that you have the funds available to make these payments when they are due and that your home is never unprotected by a lapse in coverage.

Should I get an escrow account?

Whether or not you need an escrow account is up to your mortgage lender. Many lenders will require you to fund an escrow account for home-related expenses, though this generally depends on your mortgage history, how much you put down on your home and the type of mortgage loan you have.  

Escrow accounts are also federally required for government-backed mortgage loans, such as USDA, VA, and FHA loans, and for conventional loans with a loan-to-value ratio (LTV) of less than 20%. 

Even if escrow isn’t mandatory for your home mortgage loan, it can still be very beneficial. This allows you to spread tax and insurance payments out over the year, so you aren’t caught off-guard with a hefty bill. Your lender also manages disbursements and tracks due dates, so that’s one less thing for you to worry about.

If your home requires an escrow account, you'll ultimately need to decide whether to make these monthly payments yourself or have the 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 escrow accounts

Whether or not escrow is required for your home, there are some advantages to consider.

• It’s convenient. You can contribute to multiple home bills with one monthly mortgage payment. This single payment can include the principal and interest on your mortgage loan, a contribution toward property taxes, your monthly home insurance premium, and even private mortgage insurance (PMI) premiums if required. 
• It’s easy. The process of contributing to escrow is automated. You don't need to make additional contributions; if you automate your monthly mortgage payment, you won't even need to consider those contributions. Your lender will simply calculate the total payment due and allocate the funds accordingly.
• It helps you avoid missed payments. Missing a property tax or insurance payment can mean incurring late fees and penalties at best or lapsing your homeowners coverage (and leaving your property unprotected) at worst. By putting the onus on your mortgage lender through an escrow account, you'll ensure that these important payments are never missed and late fees for those particular bills are never incurred. 
• You may qualify for potential discounts. Some mortgage companies offer discounts to borrowers in exchange for paying taxes and homeowners insurance in escrow.
• You won’t have to cover price fluctuations immediately. You’ll still be responsible for the total amount due if and when your property taxes or insurance premiums change. However, your mortgage lender will cover the difference initially if you’re paying through an escrow account — you’ll just need to pay them back for the shortage over time. 
• Escrow reports will keep you in the loop. Your lender will provide an annual report showing exactly where your money goes. This report is great for your records, helps you track current and past payments, and shows how your expenses have changed. 

Cons of escrow accounts

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

While the disadvantages of escrow accounts are small, they are important to keep in mind, especially if you prefer to be hands-on with your personal finances.

• You’ll need to fund the escrow account upfront initially. When beginning a new escrow account, you will typically be required to prepay for a portion of your property taxes and homeowners insurance premiums upfront. If you’re buying a new home, these funds will usually be rolled into your closing costs but will increase your total amount due at closing.
• It can be hard to get out of an escrow account. If you have a government-backed loan, a newer loan, or don’t meet your lender’s equity requirement, you’ll usually be required to have an escrow account. If you are no longer required or opted into an escrow account willingly, it can be a lengthy process to close your account. Your lender will need to verify eligibility, adjust your monthly payment, and return funds to you, at the very least.
• Payments can change. Property taxes and insurance premiums can and will change over time, whether due to your county adjusting your property values or you switching homeowners insurance. Escrow account requirements will then change, and your monthly mortgage payment will also be affected. In some cases, your tax bill can be more than your lender expected, resulting in a shortage that you then have to pay back on top of increased payments moving forward. 
• You’ll miss out on potential interest earnings. By sending prepaid funds for property taxes and insurance premiums to your lender, you take a burden off your shoulders. However, you lose out on potential interest you could earn by putting that cash in a high-yield savings account each year. 

How do you change homeowners insurance with an escrow account?

One of the biggest differences between mortgage insurance vs homeowners insurance is that you can choose the home insurance coverage you buy. And if you want to change that policy at any time, you can. 

If you’re thinking about changing homeowners insurance with escrow, though, the process can feel daunting. However, you might find it easier to make the switch than you think, so you aren’t stuck with a policy that doesn’t meet your needs.

Here are the steps for changing home insurance with escrow and what to keep in mind.

1. Review your current coverage. Before shopping for new homeowners insurance, you need to know what you have, what you need, and what you’d like to change with your new policy. Consider any gaps in coverage or where you might want to bulk up your policy. (For more information about what to look for, check out our post on how to change homeowners insurance.)
2. Shop around. It’s always smart to compare quotes with similar coverage options from several companies to ensure you find the best deal. Make sure to ask about any extra incentives they can provide if you do make the switch (such as new customer discounts, deals on home repair, or multi-policy bundle pricing).
3. Buy your new policy. Once you’ve picked the right coverage and insurance carrier, you can move forward with your purchase. It’s always wise to buy your new policy before canceling your old one to ensure that there are no gaps in coverage. Since you can choose the effective date for your new policy, you can either wait until your current coverage ends or opt to cancel it mid-contract.
4. Let your mortgage company know that you’re switching home insurance. Escrow payments may need to be adjusted, and your lender needs to know who insures the home and where to send premium payments. While there aren’t any fees associated with switching, you do need to give your mortgage company ample notice so they have time to reroute funds.
5. Cancel your existing policy. Once you know your new coverage is set in stone, you can cancel your previous insurance policy without worry. Just make sure that the new policy is active and in effect before this one ends.
6. Check with your mortgage lender for any payment changes. You’ll potentially have enough cash already in escrow to cover upfront payments. If you don’t, your mortgage company may need to adjust your monthly payments to cover the difference.

Changing homeowners insurance with escrow is pretty similar to changing insurance without. The biggest difference is how involved your mortgage lender will be throughout the process. 

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

You won’t pay anything extra to your lender to change your home insurance through escrow. All your lender needs to do is update where they will send the funds they collect from you every month and note which carrier is protecting the property. 

Suppose your homeowners insurance premiums were paid upfront and in full; canceling your policy before the end date will result in a prorated refund for the remaining coverage period. If you paid through escrow, insurance companies will usually send this refund to your lender, who will either return it to you or apply it to future payments.

One thing to note: You could potentially face a fee from your insurance company for canceling your policy early. Some carriers have penalties for canceling before coverage ends, especially if it’s your first year with the policy. Understanding what an insurance declaration page is can help you determine when your policy began, when it is scheduled to end, and any potential fees you may face. 

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

If you cancel a home insurance policy early, you may receive some of your money back from the carrier. Canceling a policy mid-contract will usually trigger a refund of any prepaid premiums minus any applicable penalties or fees.

This refund check will often be sent directly to you, though it may be sent to your mortgage lender in some cases if you paid through escrow. Once received, you can use those funds as you see fit, either to cover your new premiums, add a buffer to your escrow account, or deposit them into your checking account.

If you are unsure how to best use the money, give your mortgage lender a call. They’ll let you know where your current escrow account stands so you can decide whether or not to allocate some funds there.

What else could happen if I change homeowners policies in escrow?

Once you understand how to switch homeowners insurance with escrow, it’s important to note the impact that doing so can have. Here are some things that can happen if you change your homeowners insurance coverage while paying through escrow and why they matter.

• Your monthly mortgage payment may change. Depending on how your new insurance policy premiums change, your mortgage payment may also change. If you opt for more expensive coverage, expect your lender to adjust your monthly escrow payment accordingly. And if you manage to save money by switching to a more affordable policy, you will likely see your monthly payment reduced. 
• You may wind up with an escrow shortage or overage. Depending on when you change policies and how long your mortgage lender takes to make the adjustment, your monthly payment may not change immediately. This can result in an escrow shortage or overage based on your new premiums.
• You’ll need to be sure to avoid lapses in coverage. When shopping for your new policy, it's important to either buy coverage starting the same day your old policy ends or cancel your existing one once the new one is in place and active. This will help you avoid a lapse in coverage, which would leave your home unprotected.
• You’ll need to update your lender. Many insurance companies contact lenders once a new policy is purchased. However, to be sure that your lender is in the loop and can adjust your escrow accordingly, you should also call them and notify them of the change.

Escrow accounts can seem complicated on the surface. In reality, though, they are a helpful way to provide extra financial protection for you and your mortgage lender. They can also take some of the hassle out of managing other necessary payments related to your home, such as insurance premiums and property taxes. Escrow accounts are necessary in many cases, but even borrowers who aren’t required to have one should consider the value.

Still have questions?

Not sure if you completely understand how an escrow account works or if it’s necessary for you? Here are some of the most frequently asked questions.

Can I switch my home insurance at any time if I have an escrow account?

Yes, you can request to cancel your existing insurance policy and replace it with a new one at any time, even if you pay through an escrow account. It's important to ensure that your policies end and start simultaneously so there's no lapse in coverage. You should also notify your lender of the switch so they can route new payments accordingly.

Do I have to pay homeowners insurance through escrow?

You may be required to pay homeowners insurance premiums, property taxes, and more through an escrow account if you have a government-backed home loan, such as a VA loan, USDA loan, or FHA loan. Escrow accounts are also required on conventional home loans with less than 20% equity.

What happens if my mortgage company doesn’t pay my home insurance?

Mortgage servicers are required to make timely homeowners insurance payments from your escrow account, according to the Real Estate Settlement Procedures Act (RESPA). If your lender fails to pay your home insurance premiums as promised, they are legally responsible for reinstating your policy immediately or purchasing replacement coverage through another provider on your behalf.

Who renews homeowners insurance when I have an escrow account?

Many homeowners insurance policies are set up to renew automatically. If your carrier opts for non-renewal of your coverage or your policy is scheduled for cancellation, you will be responsible for either renewing coverage or shopping around for a replacement policy before the current one ends. You can then inform your lender of the switch so that your escrow payments can be adjusted accordingly.

Do I pay interest on tax and homeowners insurance when it's in escrow for my mortgage?

No, you will not pay any interest on the funds held in your escrow account for property tax or homeowners insurance payments. However, some states — like New York — require your mortgage lender to pay interest to you on those funds.