Home Insurance and Your Escrow
How is my home insurance paid?
There are two basic ways to pay for your homeowner's insurance:
1) You pay for it out of your own pocket.
2) Your mortgage company pays it on your behalf, and you pay the mortgage company back.
The first scenario is pretty straightforward - if you put enough money down on your home loan, your mortgage company may allow you to handle the payments of your taxes and insurance yourself. This allows you to choose your own preferred payment method for your insurance, which would be paid separately from your regular mortgage payments.
The second scenario is the much more common scenario. The mortgage company that approves you for a home loan creates an escrow account for your taxes and insurance. Whenever it’s time to pay for your renewal, the mortgage company has funds set aside in your escrow account and will take care of the payment for you. You just have to pay your monthly mortgage payments.
If you’re purchasing a new home or refinancing, make sure you consult with your lender about the benefits of setting up an escrow account.
What is an escrow account?
Good question! Think of it as a forced savings account. Each month your mortgage company will charge you an additional amount of money to cover the insurance and property taxes. They take that additional money and deposit it into the escrow account. After 12 mortgage payments, you then have a full year’s worth of home insurance and property taxes saved up and ready to go. When the bill comes, the mortgage company will then use those funds to pay the taxes and insurance.
Your normal mortgage payment is $1200.
Insurance premium is $1800 a year ($150 a month)
Property taxes are $3600 a year ($300 a month)
Your monthly payment to the mortgage provider: $1650 ($1200 + $150 + $300)
How does switching insurance affect my mortgage?
Switching your insurance may be easier than you think in terms of how it affects your mortgage. If you have an escrow account, you should send a copy of your new policy to your mortgage company (or ask your insurance agent to send a copy).
You’ll also want to make sure the new policy is getting paid. Since your lender is in charge of paying your insurance from your escrow account, make sure they get notice of the new policy on your behalf. From here, your mortgage company will switch out the insurance and any potential refund of the former policy will be sent to you. I suggest putting this money back in your escrow account, because that’s where it was in the first place! You can do this by reaching out to your mortgage provider and asking them to apply an extra payment to your escrow account balance.
If you pay for your insurance out of your own pocket (not through your escrow account), just make sure your mortgage company gets a copy of your new insurance so they know you are protected. Until you pay off your home, your lender has a direct financial interest on your house (because they own a piece of it!).
What do I do if I got a refund from my old home insurance policy?
Let’s say that you happen to get offered a better home insurance policy in the middle of the current insurance policy term. Nice!
If you’re midterm with your current policy, you most likely will get a refund back from your old carrier for any unused premium paid. Even better! Even if your mortgage provider is the one paying the bill (through your escrow account), your name is on the homeowner's policy, so typically the money gets sent back to you.
Before you go buy that new set of Airpod Pros you have been wanting, I would first make a call to your lender before cashing the check, and they can advise you on the next steps to make sure your escrow stays in order. In most cases, it would be smartest to go ahead and put the refund check back into your escrow account.
What to do if my mortgage is sold?
Most of the time when your mortgage is sold, they’ll send a letter to you as well as your current home insurance carrier to make sure that the mortgagee on your policy is updated. But it never hurts to call your agent and proactively make sure the policy is up to date!
Most mortgage companies have a specific way they request to be named on your policy. When their information is listed on your policy, you may have noticed it includes a unique acronym: ISAOA. This stands for “Its Successors and or Assigns”. This is that insurance lingo that gives the first mortgage company your loan was with the ability to sell off your loan to another lender and assign the rights of the policy over to them.
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