How does my escrow account work with my homeowner’s insurance

Closing on a new house?

Paying off a mortgage?

Trying to move your home insurance before the renewal date?

These are all questions or reasons why you might be wondering, how does my escrow account work with my homeowner’s insurance.

Escrow Account

In case you are unfamiliar with an escrow account, let’s explain that first. An escrow account is set up with your mortgage to collect and distribute money to pay expenses like taxes and insurance. Most mortgage companies and mortgage loans are set up an escrow account right from the start.

One thing to caution you on is that different types of loans might not be able to be set up to collect and pay for taxes and insurance. So just because you have an escrow account it might not automatically be set to pay BOTH of these expenses.

Purchasing a new house

Congratulations, you are closing on your first house or just a new house, or maybe even refinancing your house, and during the process, you’re setting up an escrow account.

What does that mean? Well, if you’re just buying a house, 99% of the time, if you’ve got a mortgage, they’re going to require you to pay the first year’s homeowner’s insurance premium in full.

This allows the escrow account to be set up to start collecting monthly premiums from you, all built into your monthly mortgage payment under the escrow portion, to pay the following year’s insurance.

Moving your insurance midterm

We have seen this a lot over the years and it can be relatively confusing.

You found new insurance that you want but your renewal is 6 months away and your escrow account has already paid the year in full.  What happens?

Unfortunately, there is not one single answer to this and it truly depends.

But, we have two solutions to make sure it gets straightened out and fixed as easily as possible. The reason there is no single answer for this is because each mortgage company is different, each escrow account is different and will depend on a few different factors.

Solution 1: Your escrow account pays the new insurance again even though it is in the same year as the last payment. This will cause a shortage in your escrow account. To fix this, the refund you receive from the old insurance company needs to be sent into your escrow account.

Please note: Insurance companies will refund the policyholder, not the mortgage company.

Solution 2: Your escrow account does not have enough money to pay the new insurance or they have a general rule that they refuse to pay more than once in a year. The consumer then uses the refund from the old insurance company to pay the new insurance company.

One important thing to note is to make sure you pay close attention to which solution you need to use because it won’t be known until after you get the new insurance issued and bills are sent out.


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Why does it matter

Buying a house is one of the most exciting times in anybody’s life. It is probably the biggest financial investment you’re going to make, and there are so many moving parts during that two or three month period between finding the house, inspecting the house, getting approved for the mortgage, and going through all these things.

Insurance is usually the last item that you need in that process, but it is the one thing that’s going to stay with you all of the life of owning a home. Make sure that you are reviewing these things before buying a house, contact an insurance professional that’s going to explain the setup and how this works for you going forward. Do not just get something set up fast without truly understanding every part of it.

What’s Next?

Working with an independent insurance agent will help you understand the coverage you have and what you need especially during the home buying process.

If you don’t have a relationship with an agent or want a review of your insurance?

Click below to learn more about how to proceed.



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