Myths Vs. Facts About Escrow and Insurance

How does having an escrow account affect your home insurance? There is a lot of misinformation out there, and the purpose of this article is to expose some of those common misconceptions. Keep reading below for some of the most common myths and facts.

The most common questions center around canceling or switching home insurance with an escrow account. Read below for some of the biggest myths and facts when switching insurance.

Myth: with an escrow account, you can’t switch your home insurance mid-policy.

Fact: you can switch your home insurance any time, regardless whether or not you insurance is kept in escrow.

Myth: switching home insurance companies requires a large down payment.

Fact: switching home insurance with escrow requires no money out-of-pocket. Home insurance is paid out of your escrow account. When a new policy starts, the escrow will front the bill. If the escrow account doesn’t have the funds to pay for the new insurance policy, however, you will be hearing from them. More on that later.

Myth: it is difficult to switch your home insurance with an escrow account.

Fact: it is extremely easy to switch your home insurance with an escrow account. It can be done in four simple steps:

First, shop for and choose a new policy. Set up a start date for that new policy.

Second, call your mortgage company to notify them of the change. Make sure to have your loan number, your new policy number, and the phone number of your new agent.

Third, cancel your old policy.

Fourth, as necessary, send some or all of your refund check from your old home insurance policy back to your escrow account to ensure sufficient funds.

Myth: if your escrow account doesn’t have enough money to pay for a new home insurance policy, you can’t switch insurance companies.

Fact: you can switch home insurance companies, even if your escrow doesn’t have the required funds. There are three ways to do this:

First, you can pay the home insurance premium out-of-pocket for the first year.

Second, you can fund your escrow by sending a one-time payment into the escrow account to cover the cost of the new insurance policy.

Third, you can send the full refund check to the escrow account immediately after its received when you cancel your old policy.

If home insurance is switched or canceled prior to the expiration of the policy – and if your escrow is paying the bill – there is usually a refund check involved. Below are the most common misconceptions about this refund check.

Myth: refund checks for switching insurance go to the mortgage company directly.

Fact: refund checks go to the insured, not to the mortgage company or to the escrow.

Myth: the refund check received from switching home insurance is not my money, it’s the escrow account’s money.

Fact: the refund check is 100% your money. It is not the mortgage company’s money and they have no right to find out how much of a refund you received and what you did with it.

Myth: you need to send the refund check received from switching home insurance to the escrow account.

Fact: you do not need to send the refund check to the escrow account. It is your money and you can decide what to do with it.

Just because the refund check is yours, however, doesn’t mean you shouldn’t send some or all of it back to the escrow account.

Escrow accounts are used to pay property taxes and insurance, and they are funded through your monthly mortgage payments. Escrow accounts usually pay home insurance annually upfront – that’s why you receive a refund check if you cancel it before expiration.

If – as a result of you keeping the refund check – your escrow account does not have the funds to pay the property taxes and home insurance when due, the mortgage company usually either requests you put in an additional one-time payment to the escrow, or increases your monthly mortgage payment.

Finally, some questions arise regarding fees and how to remove escrow accounts. Those myths and facts are discussed here.

Myth: you will be charged a cancellation fee for cancelling a home insurance policy early.

Fact: most home insurance policies do not have cancellations fees. You should double check just to be sure, but its far more common not to have a fee than to have one.

However, some companies do have something called a policy fee for issuing your insurance policy. This fee is usually “fully earned” when the policy is issued, and if you cancel before the end of the policy, the insurance company keeps this fee.

As an example – your policy is $1,200 annually, and there is a $50 policy fee for a total of $1,250. If you cancel your policy at its mid-point, you would get a refund for half the premium ($600), but not any of the $50 policy fee.

Myth: if you put 25% down on your home, you aren’t required to have an escrow account.

Fact: if you put 25% down on your home you might be able to remove the escrow. Mortgage companies strongly prefer escrow accounts, and thus the requirements to remove it vary from company-to-company. A loan-to-value of 75% used to be the defacto standard for removing the escrow requirement, but that is no longer a sure thing.