Most mortgage companies will require the borrower to escrow their home insurance. Lenders require this because they’ll know when the home insurance policy has been paid (or not paid) and will know that their investment into your home in insured.
Because they require the home insurance to be escrowed, this can often cause some confusion when it comes to paying the premium, or getting a refund when switching home insurance.
Here are a few scenarios which you might find yourself, and the guidance on how to handle that situation.
If Home Insurance is Escrowed and you’re switching Home Insurance with New Home Loan
Your new lender will require information regarding your homeowner’s insurance. Tell them you are switching companies and give them our contact information. We will send your new lender all the information they will need to get your loan approved and through underwriting.
At closing, the lender will collect funds to pay for your initial annual premium. They will also collect money each month in escrow to pay your premium each year at renewal. After closing, you will then cancel your previous home insurance (if applicable) and when you receive that refund, you can keep the money and do as you please. Your new mortgage escrow account is properly funded and your new home insurance is paid in full for the year.
If Home Insurance is Escrowed and you’re are Switching at Renewal, outside of a loan transaction
This one is easy. The old insurance will end and the new insurance will start on the same date. Because it is handled at renewal, there is no refund to receive from the old insurance.
To make this a smooth transaction, contact your lender 30-60 days in advance of your policy renewing and tell them not to pay the renewal for the “old” insurer and let them know you’ll be getting new insurance at renewal. On the renewal date, you simply call your lender back and authorize the payment to the new insurance company. Your insurance advisor will help get the new policy in place and send an invoice for payment to your mortgage company.
Because this is handled at renewal, there shouldn’t be any shortage or change in your mortgage escrow account because they have been setting aside money each month to pay your insurance premium at renewal. Now, instead of paying the old insurance company, they are simply paying the new insurance company.
Make sure to call your “old” home insurance company and officially cancel their policy, effective on the renewal date. Of course, if your lender doesn’t make a payment to them; your “old” policy will cancel for non-payment. We always advise to call and cancel your payment instead of letting it lapse for non-payment. This will avoid any unnecessary headache and potential billing issues.
If Home Insurance is Escrowed and Switching Mid-Term, outside of a loan transaction
This is where things can get a bit complicated.
Your insurance advisor will invoice your mortgage company for your new insurance policy premium. You will need to cancel your old home insurance policy.
You will receive a pro-rated refund from your previous home insurance company. The date it was written vs the date it was canceled will determine how much of a refund you will receive.
For your new home insurance payment, you will need to contact your lender or loan servicing company to determine if they will simply make the new payment. Typically, larger banks that service their own loans (Bank of America or Wells Fargo) will “float” the new payment for you and wait for the refund to re-balance your escrow account.
The reason they have to “float” the payment has to do with your pro-rated refund mentioned above. Your mortgage escrow account already paid for your home insurance premium earlier in the year (previous 12 month period) to your old insurance company. Now we are asking them to make a 2nd home insurance premium payment in the same year (12 month period) to your new home insurance company. This will cause a shortage in your escrow account as they only collect enough to cover 1 insurance payment.
Now that there is a shortage, this needs to be corrected.
Once you get a refund from your prior insurance company, you will need to send those funds back to your lender to re-balance your escrow account and rectify the shortage.
Some mortgage companies will only make 1 insurance payment in a given year. In this case, you may have to make the payment yourself and wait for your own refund.
Either way, a payment is made to the new insurer and the refund from the “old” insurance company replaces the outlaid funds.
If you have to lay out the money personally, you may simply pay on a credit card and apply your premium refund to the next credit card payment…just be sure to ask your previous insurer how long it takes them to cut a refund check and time it accordingly.
Making a Smooth Transaction
Dealing with escrow accounts and home insurance premiums can often be challenging.
Make sure you work with an Insurance Advisor that can explain these intricacies to you, and is willing to go the extra mile for you, so you can get on with your life and enjoy being in a beautiful home.
