It’s official! You have decided to buy a home under a mortgage. Owning your own home isn’t just rainbows and unicorns. You will soon realize that the expenses are beginning to pile up. Apart from the payment to your lender, you will also have other bills related to the purchase of your home. You will also be responsible for several expenses like taxes and insurance. If you are not aware of this, your lender will set up an account in your name solely for this purpose and it is called an escrow. Since the escrow is handled by your lender, do you get to have a say on your home insurance? Read on to find out.
What is an Escrow Fund?
First things first, what is an escrow fund? According to Investopedia, “Escrow is a legal concept describing a financial instrument whereby an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The escrow agent holds the funds or assets until it receives appropriate instructions or until predetermined contractual obligations are fulfilled.”
When it comes to a mortgaged house, your lender will manage an account that holds payment for your taxes and insurance. It helps ensure prompt payment for these necessary expenses and that the buyer has sufficient funds for paying them. This fund will be held by the lender until the home is fully paid.
The Homeowner’s Right to Choose The Insurance Provider
Since the escrow fund holds the money for the payment of your insurance policy, does that mean that the lender decides on all things related to your insurance? Absolutely not! As the homeowner, you would have the final say about the insurance policy that you would want to purchase. You are also protected by the Real Estate Settlement Procedures Act or RESPA that provides each homeowner with the right to choose the insurance policy they want to purchase.
The homeowner can still shop around to make sure that they purchase the insurance policy that provides them with the best rates. Some homeowners also choose to get insurance policies by the bundle that allows for more premium discount. In order to maximize your insurance policy, you need to look for the best rates to help you get the best value for your money.
On the other hand, the RESPA act also seeks to protect the lender by setting their own requirements to ensure that the insurance policy purchased by the homeowner meets the coverage requirements. It works to make sure that the property is completely protected against any form of damage.
The Change in Homeowner’s Insurance Provider
In case you have decided to switch your insurance provider, there are different steps that you should follow to ensure a smoother transition.
Notify your Lender
If your insurance policy is being paid using an escrow account, you need to inform your lender of the switch. Your lender may ask about your loan number to track your account. You need to provide them with the necessary information like your new insurance provider and the corresponding policy number. It is also important to let them know about the cost of your new policy along with the insurance agent in charge of your policy.
Cancel your Existing Insurance Policy
Since you now have a new insurance policy, you will need to personally cancel your current insurance policy. You should call your current provider to inform them that you will be canceling your existing insurance policy. If in case you are due for a refund from your previous insurance provider, the insurance company would send it directly to your account. In this case, you would have complete access to the funds.
Payment for New Policy
When your insurance premium payment is held under escrow, the payment for your new policy should still be taken under your escrow account. If in case the amount on your escrow account is still insufficient, you may need to pay for the expenses from your own pocket.
However, you don’t have to worry since your lender should pay you back for your out-of-pocket expenses. On the contrary, if the new policy is more expensive than the old one, you may need to add funds to your escrow account.
TIP: Make sure that your new policy has been approved before you cancel the old one to ensure that there is no gap in your insurance.
In conclusion, as the owner of your home, you should have complete freedom to choose the best insurance coverage. However, since your home is under a mortgage, you need to comply with the standard coverage requirements by your lender. This is why it is important to keep your lender informed when changing your homeowners insurance, especially if you have an escrow account.
