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If you’ve owned your home for a while, you may wonder if your homeowners insurance is still a good deal. But just when you’re about to start comparing quotes, you remember: Your insurance premiums are paid through an escrow account.
Panic prickles up your neck as you realize you’re not entirely sure what escrow means, never mind what happens to it if you change insurers.
But changing homeowners insurance, even when it’s paid through escrow, is pretty painless. Just follow the steps below.
First, what’s an escrow account?
If closing day was the last time you heard the words "escrow account," here’s a quick refresher:
It’s where your lender stashes a portion of each mortgage payment you make.
Your lender uses the funds to pay property tax and homeowners insurance bills on your behalf.
Escrow accounts are generally required if your down payment is less than 20%.
Escrow makes paying taxes and insurance a “set it and forget it type of thing,” says Jason van den Brand, CEO and co-founder of Lenda, a San Francisco-based mortgage lender.
How to make the homeowners insurance switch
Now that you remember how escrow works, let’s tackle the original issue: Changing homeowners insurance when the premiums are paid through an escrow account.
Step 1: Inspect your current policy
You’ll need to know your annual premium, coverage and deductible so you can compare it to similar policies. Look for this information in your policy documents or by logging on to your insurer’s website.
Watch for the mention of early cancellation fees as well. If there’s a penalty for canceling in the middle of your policy, you can still shop around. Just note the renewal date and plan to make the change then.
If you can’t find the policy information you need or don’t understand the documents, contact your insurance company for help.
Step 2: Shop for better rates
Once you’ve examined your current policy, find out whether it makes sense to switch by getting quotes from at least three other companies. A lower premium, customized coverage and additional perks, such as free identity theft insurance, are all good reasons to change insurers.
Use NerdWallet’s tool to get quotes from top insurance companies and compare their services.
When comparison shopping, be sure you get quotes on identical homeowners insurance policies. This is where knowing your current policy inside and out comes in handy. If you’ve refinanced or made significant home improvements, the home value on your policy might be outdated. You'll want to provide the new insurer with a more accurate estimate.
» MORE: See how much your home is worth
Step 3: Give your mortgage servicer a heads-up
You don’t have to tell your mortgage servicer before changing insurers, but you should. Cluing them in will let you know what to expect from the process and help you avoid inadequate coverage.
Your mortgage company wants to be sure the new policy will pay to replace your home if it’s completely destroyed, says Jon Snyder, senior product manager at Esurance.
If you change homeowners insurance without notifying your mortgage servicer, send it a copy of the new declarations page and written notice that you canceled the old policy as soon as possible.
Step 4: Buy the new policy before canceling the old
A lapse in coverage could spell trouble if Murphy’s Law strikes. Play it safe by scheduling your new policy to be active before the old one is canceled.
You may get a refund check for unused premiums if you cancel in the middle of your policy, says Kirk Gerling, senior vice president of customer contact at Carrington Mortgage Services. But don’t rush out to spend it; you may need to return those funds to the escrow account to pay for the new policy.
Step 5: Leave the rest up to your servicer
As soon as you schedule the switch, notify your mortgage servicer. It will update your records so future payments go to the right company, Snyder says.
If your new homeowners insurance policy is more affordable, switching may result in an escrow surplus check at the end of the year. If your new premiums are higher, or your state requires a minimum balance, you may owe the escrow some money, van den Brand says.
But don’t worry about wasted funds: Anything you’ve put into escrow will either come back to you as a refund or be used to pay future premiums.
» MORE: Best mortgage lenders of 2018
Homeowners insurance part of a bundle?
Insurance companies like bundled policies, Snyder says. Customers who bundle tend to stay with the company longer because it's more of a hassle to change insurers and they’re getting a better price.
If you’ve bundled your homeowners insurance with other policies, you have two options:
Shop other insurers’ bundled rates and consider moving all your policies.
Find out what your home policy costs on its own and compare that to unbundled quotes from other insurers.
The bundling discount your insurer promised may not be as big as you think. If you decide to unbundle, it’s a good opportunity to shop for cheaper auto insurance too. Depending on rates in your area, choosing separate companies for each policy may be the best way to save.