Escrow and homeowners insurance

How does escrow and homeowners insurance work?

When you close on your home, your lender may set up an escrow account for depositing part of your monthly loan payment to cover your real estate taxes, homeowners insurance premium, and, if necessary, private mortgage insurance. Your mortgage lender deposits a designated amount from your mortgage payment into the escrow account each month and then directly pays your homeowners insurer.

Escrow accounts can vary depending on your lender, type of property, and location. If you're concerned about the process or have specific questions about your escrow account, contact your lender or a qualified mortgage professional.

What are the benefits of escrowing?

An escrow account comes with a few advantages, including:

• Convenience: It's easier for homeowners to write one check per month and let your lender disburse what's owed to the taxing authority and insurance company, rather than paying numerous bills each month with different due dates.
• Timely payments: Having an escrow account ensures your homeowners premium is paid on time, which is important for maintaining continuous coverage.
• Automatic adjustments: Your cost for homeowners insurance and property taxes may change annually, and your lender can automatically adjust your escrow payment. If there aren't enough funds in your escrow account, your lender may cover the shortage (you'll make up the difference with increased future payments).

Common myths about escrow and homeowners insurance

Here are some misconceptions regarding escrow accounts relating to homeowners insurance:

• Myth 1: Shopping for new homeowners policy impacts your escrow account. Shopping for insurance has no impact on your escrow account. Your current insurer and mortgage company won't be notified — or even be aware — that you're looking to change your homeowners insurer.
• Myth 2: Switching insurers is too complicated. Once you find a new policy, you may be concerned that switching to the new insurer may require countless phone calls. However, your new homeowners insurance company usually handles the switch for you and sends the bill, as well as proof of insurance, to your mortgage lender.
• Myth 3: Time-consuming paperwork is required. If your new insurer doesn't handle the switch for you, you can simply email your lender and give notice that you canceled your old policy — include your homeowners declarations page from your new policy.

How is an escrow payment calculated?

Your lender estimates the total annual costs, including your homeowners insurance premium, property taxes, and any other related expense such as private mortgage insurance. The annual cost amount is divided by 12 to determine your monthly escrow amount.

Do you have to pay homeowners insurance through escrow?

If your down payment is less than 20% of your home's value, your lender may require you to pay your homeowners insurance through an escrow account. This ensures your insurance premium is paid on time monthly with no lapse in coverage and helps protect the lender's investment in your home.

Do you have to switch insurance companies when you refinance?

In most cases, you should be able to keep your current homeowners insurance when you refinance your mortgage. Your lender will add your insurance premium to your new escrow account and continue paying for your insurance. If your new loan has different insurance requirements, you may need to adjust the coverage limits on your current policy.

Is homeowners insurance cheaper in escrow?

An escrow account has no impact on your premium; it doesn't make homeowners insurance cheaper or more expensive.

Learn how you can lower your existing rate for homeowners insurance, and get tips if this your first time shopping for homeowners insurance.