Escrow Accounts and Midterm Insurance Changes: A guide for Homeowners

Buying a home in Tennessee comes with a lot of new terminology – one of those terms is an escrow account. If you have a mortgage, chances are you have an escrow account managed by your lender. In this post, we’ll break down what an escrow account is, how it works (especially for paying your homeowner’s insurance), and what happens if you decide to switch your home insurance policy mid-term. Switching insurance may sound complicated when your payments are handled through escrow, but it’s more manageable than you might think. Let’s dive in!

What Is an Escrow Account (and How Is It Set Up)?

An escrow account (sometimes called an impound account) is like a savings account your mortgage company maintains to pay certain home-related bills on your behalf. Each month, a portion of your mortgage payment is deposited into this escrow account to cover expenses like homeowner’s insurance premiums and property taxes when they come due. Think of it as a piggy bank for your home’s big recurring bills – you contribute a little each month instead of paying a lump sum when those bills arrive. This arrangement not only makes budgeting easier for you, but it also protects the lender by ensuring these important bills (insurance and taxes) are paid on time.

Setting up the escrow at closing: When you close on your mortgage, the lender will typically set up your escrow account and fund it with an initial deposit. In Tennessee (as in other states), this means you’ll pre-pay a few months’ worth of insurance and tax expenses into the escrow account at closing. This upfront cushion (often equal to about two months of payments) is required so the account never runs dry even when big bills are due. After that, your monthly mortgage payment includes an escrow portion – your lender estimates the yearly insurance and property tax bills, divides that by 12, and collects that amount each month to hold in escrow. For example, if your annual homeowners insurance is $1,200, roughly $100 per month of your payment goes into escrow for insurance, plus the portion for taxes, etc. The lender then pays your insurance and taxes out of this account when the bills are due.

Why escrow? For homeowners, escrow accounts offer convenience – you don’t have to remember to save for taxes or insurance since it’s built into your mortgage payment. For lenders, escrow accounts provide confidence that the property taxes won’t go unpaid (which could lead to liens) and that the home is continuously insured (protecting their collateral). It’s a win-win in that sense. Do note that if your down payment was less than 20% (common for first-time buyers), your lender likely required an escrow account as a condition of the loan. In some cases, once you build enough equity or meet certain requirements, you might be allowed to cancel escrow and pay these bills on your own – but many Tennessee homeowners keep escrow for ease of mind.

How Your Mortgage Lender Uses Escrow to Pay Insurance

Once your escrow is set up, your mortgage servicer will use it to pay your homeowner’s insurance premium (as well as property taxes and any required mortgage insurance) when those bills come due. Home insurance is typically billed annually. Here’s how it works:

• Annual insurance payment: Your insurer will send a renewal bill for your homeowners policy to you and your lender each year. Instead of you paying the bill out-of-pocket, your lender pays it from the escrow account on your behalf. Since you’ve been contributing monthly, the money is there to cover the premium. You might get a notice from your insurance company or see it on your escrow statement, but no action (or big payment) is needed from you at that time – convenient!

• Escrow balance and adjustments: After making the insurance payment, your escrow balance might dip low, which is expected. Lenders will continue collecting the monthly escrow portion to build it up again for future bills. Each year, your lender performs an escrow analysis to make sure they’re collecting the right amount. If your insurance premium or taxes changed, your monthly escrow payment may be adjusted up or down accordingly. For example, if your insurance premium went up $100 for the year, the lender might raise your monthly payment by about $8-9 to cover the difference. If they had collected too much and a surplus exists, you typically get a refund for the overage (usually any surplus over $50 is refunded).

• Keep an eye on it: Even though the mortgage company handles the payments, it’s wise to stay on top of your insurance. Make sure you renew your policy (your insurer usually sends renewal info to you and the lender). Double-check that your insurance company has your current lender’s details and loan number correct, so the bill is sent to the right place. As a homeowner, you ultimately want to ensure the premium was paid on time. (If a mistake happens – say the lender didn’t pay and you get an unpaid bill notice – contact your lender immediately to sort it out. Lenders are required to make timely payments, but errors can happen, and you don’t want your policy to lapse.)

Now that we understand escrow basics, let’s talk about changing your homeowners insurance policy midterm and how that affects your escrow account.

Switching Home Insurance Midterm: What Happens?

Maybe you found a better insurance rate or you’re unhappy with your current insurer’s service, whatever the reason, homeowners can switch insurance companies at any time, not just at renewal. However, doing this in the middle of your policy term raises a big question: how does it work if my insurance is paid through escrow? The good news is switching homeowners insurance when you have an escrow account is very doable, and it’s not much harder than switching when you pay insurance on your own. Many people mistakenly think having escrow makes it impossible to change insurers mid-year, but that’s a myth. You just need to follow a few extra steps to keep your lender in the loop. Here’s what to expect:

• No major cost or penalty to switch: Generally, you won’t be penalized by your mortgage company for changing insurance. Your lender’s main concern is that you maintain continuous coverage. Most insurance companies won’t charge a penalty for canceling midterm either – you’ll simply pay for the time you were insured and get refunded the rest. (It’s wise to check your policy or ask your agent if any cancellation fee applies; some may charge a nominal fee or short-rate penalty, but it’s usually small or waived in practice.) In fact, when you cancel a policy midterm, you are typically entitled to a prorated refund for the unused portion of the year’s premium. That refund is key to handling your escrow, which we’ll get into below.

• Avoiding lapses or double coverage: The trickiest part of switching is timing it right. You’ll want your new insurance policy to take effect on the same date your old policy is canceled to avoid any gap (no lapse in coverage) and to avoid paying for overlapping policies. It often works best to secure a new policy first and set its effective date, then cancel the old policy effective that same day or the day before the new one starts. If possible, wait to receive confirmation documents for the new policy before officially canceling the old – just to be safe that the new coverage is in force. Your old insurer can usually handle a future cancellation date, or even backdate a cancellation by a few days if needed, so timing can be flexible as long as you communicate.

Now, let’s break down the steps to switch your homeowners insurance midterm when you escrow your insurance payments, so everything goes smoothly with your mortgage company:

Steps to Switch Homeowners Insurance (When Your Mortgage Escrows the Payments)

1. Shop for and purchase a new homeowners policy. Just as you would normally, compare quotes and coverage from different insurers to find the policy that suits your needs and budget. Once you choose a new insurer, let them know you have a mortgage with an escrow account. Confirm the “mortgagee clause” details with your lender and provide them to the new insurer before buying the policy. The mortgagee clause is the official name and address of your lender (often a specific address for insurance documents) and your loan number. Providing accurate lender info is crucial so that your new insurance company knows where to send the bill and proof of coverage. After that, go ahead and purchase the new policy, effective on the date you want coverage to switch. Typically, since you are escrowed, you do not need to pay the new policy premium upfront out of pocket – you can tell the new insurer to bill your lender via escrow. (They may have you sign an application and show proof of escrow, but this is standard.) Once bound, the new policy will usually automatically generate a declarations page and notification sent to your mortgage company.

2. Cancel your old insurance policy (effective the same date). After securing the new policy, contact your current insurance company to cancel your existing homeowner’s policy. Line up the cancellation date with the start date of the new policy – this ensures no coverage gap and also no redundant double coverage. You can say, “Please cancel my homeowners insurance effective [date], as I have obtained a new policy.” If you’ve already started the new policy, many insurers can also backdate the cancellation to match that start date if you cancel a few days later. Be sure to get confirmation of the cancellation. They should issue you a policy cancellation confirmation and calculate any prorated refund owed for the unused premium.

3. Notify your mortgage lender or escrow company. Even though your new insurer will likely notify your lender (and your old insurer may send a cancellation notice), it’s important to proactively inform your mortgage company about the switch. Call or message your loan servicer’s escrow department and let them know you’ve changed insurance. Provide the effective date of cancellation for the old policy and the details of the new policy: the insurance company name, policy number, and start date. This helps ensure they update their records and don’t accidentally send a payment to the wrong insurer. It also prompts them to look out for the bill from your new insurance company. Lenders appreciate the heads-up – it reduces confusion and ensures your escrow disbursements go to the correct place.

4. Handle the refund from your old policy properly. This is a critical step when switching midterm. Since your previous annual premium was likely paid in full from escrow, canceling the policy means some of that money is coming back. After cancellation, your old insurer will issue a prorated refund for the unused premium (usually within a few weeks). Now, what do you do with this refund check? If your insurance was escrowed, that refund really belongs to the escrow account to replenish it. In many cases, the insurance company will mail the refund check directly to you (the policyholder), even though the money originally came from your escrow. It might be tempting to pocket this check – but don’t! The smart move is to send that refund to your mortgage lender to deposit back into your escrow account. This way, you won’t have a shortfall. If you keep the refund yourself, your escrow will now be underfunded (because it paid out the full year premium and didn’t get it all back) and you’ll likely see an escrow shortage on your next statement, which could increase your monthly payment to make up the difference. Contact your lender’s escrow department for instructions on how to endorse and mail the refund check to them (or if the check is made out jointly to you and the bank, follow their process to handle it). In some cases, the refund check might be made out or sent directly to the mortgage company – especially if the insurer knows it was escrow-paid. But you should verify this; if you receive the refund, promptly forward it to the lender for deposit. This ensures your escrow account stays on track.

5. Watch for escrow adjustments. After the switch, your escrow account will eventually be rebalanced to reflect the change in insurance premiums. If your new policy’s premium is lower, you might end up with an excess in escrow (or a smaller required payment) going forward; if it’s higher, you might have a shortage. Lenders perform an annual escrow analysis, but you can also request one sooner due to the insurance change. Either way, be prepared that your monthly mortgage payment could change slightly to account for the new premium. Also, any overpayment the lender already sent to the old insurer should come back as that refund we discussed – once that’s back in escrow and the new premium is paid, everything should balance out. Keep an eye on your next escrow statement or ask your lender to confirm that the new insurance bill was paid and the refund received.

Following these steps will cover most of the heavy lifting. Essentially, you’re making sure the new insurance is in place and paid from escrow, the old insurance is canceled, and the escrow account is made whole after the dust settles. Now let’s go over some extra tips to ensure a smooth transition.

Tips for a Smooth Insurance Switch (When You Have Escrow)

Switching your homeowner’s insurance doesn’t have to be a headache. Here are some best practices for homeowners in Tennessee to avoid confusion or missed payments during the switch:

• Don’t cancel your old policy before the new one starts. This may sound obvious, but timing is everything. Make sure you have your new insurance policy bound and effective (with an effective date and policy number confirmed) before you cancel the old policy. Cancel the old policy effective the same date the new policy kicks in to prevent any gap in coverage. A short overlap of one day is okay if needed, but aim for a seamless transition.

• Inform your lender early in the process. As soon as you decide to switch (or once you have new coverage lined up), call your mortgage servicer’s escrow department and let them know. Ask them what they need from you. In many cases, simply providing the new insurer’s info and confirming they’ll receive the bill is enough. This helps prevent mistakes like the lender accidentally sending a renewal payment to your old insurer. It also alerts them to expect a new declarations page and insurance bill. Being proactive with communication can save you from potential escrow chaos (like double payments or lapses).

• Ensure the new policy meets your lender’s requirements. Lenders typically require that you maintain a certain level of coverage (at least equal to the loan amount or full replacement cost of the home) and that the deductible isn’t too high. When shopping for new insurance, verify that your new policy meets these standards. Your insurance agent can help confirm this, and your lender will review the new policy when notified. All standard homeowners policies from reputable insurers should satisfy a typical mortgage, but if you’re increasing deductibles or changing coverage amounts, double-check to avoid any issues.

• Watch for the refund and send it to escrow. We can’t stress this enough: if you get a refund check from the old insurer, don’t toss it in your personal bank account and buy a new TV 😄. That money was drawn from escrow and generally needs to go back there. Contact your lender for instructions, and mail the check or upload it as directed so they can credit your escrow account. This way you avoid an escrow shortage (which would later show up as a higher mortgage payment). By keeping the escrow funds where they belong, you maintain smooth sailing.

• Keep documentation of everything. Save copies of your new policy’s declarations page, the cancellation confirmation from your old policy, and any refund check stubs or receipts. Having these on file can help resolve any discrepancies. For instance, if your old insurer mistakenly didn’t send a cancellation notice to your lender, you can provide your copy. Or if the escrow refund doesn’t seem to be applied, you have proof of when and how you sent it.

• Be aware of possible escrow payment changes. After switching, ask your lender if an out-of-cycle escrow analysis is needed or if they will handle the adjustment in the next annual review. If your new premium is significantly different, expect your monthly escrow portion to change accordingly. For example, if you lowered your premium by $300/year, your mortgage payment might eventually go down by around $25/month (or you could get an escrow overage refund) once things reconcile. Conversely, a higher premium means you might owe a bit more each month into escrow. Knowing this in advance helps avoid surprise when you see your mortgage statement updated.

• Check for any cancellation fees or overlap. Though most insurers prorate the refund, some might hold a minimum earned premium or charge a small fee if you cancel midterm. It’s worth asking your old insurer if any fees apply for midterm cancellation. Often it’s negligible, but it’s good to know. Also, ensure you’re not double-covered: if for some reason there’s overlap (e.g., you canceled a few days late), confirm that the old insurer will refund the overlapping days – typically they will, as long as you provide proof of new coverage starting on a certain date.

By following these tips, you’ll minimize the chances of escrow confusion or coverage issues when changing insurance. Next, let’s address a few common questions or misconceptions homeowners often have about this process.

Common Questions & Misconceptions

• “Is it harder to change insurance if my payments are escrowed?”
  It’s a bit more paperwork, but not really harder. The process is almost the same as if you were paying the insurance yourself. The key difference is you need to loop in your mortgage company. As long as you notify your lender and handle the escrow refund properly, switching insurance with an escrow account is straightforward. In fact, successfully switching could even lower your monthly payment if you get a cheaper premium, since your escrow collections would decrease accordingly!

• “Do I have to wait until my policy renews to switch?”
  No. You can switch homeowners insurance anytime during your policy term. Many people choose to shop around at renewal (since that’s when premiums often change), but you are free to change midterm. Just remember you’ll get a prorated refund for unused coverage, and check if your insurer has any early cancellation policy (most just refund you without penalty, or with only a minimal fee if at all). Don’t let the fact that you have an escrow account make you feel “locked in” with an insurer – you’re in control of your insurance choice.

• “What happens to my mortgage payment if I change insurance?”
  In the short term, nothing drastic – you’ll keep paying your mortgage as usual. Over the longer term (by the next escrow analysis), your monthly payment could go down or up slightly depending on the new premium cost. If your new insurance is cheaper, you might get an escrow surplus refund or a reduction in payment. If it’s more expensive, expect a shortage – the lender might ask for a one-time payment or adjust your monthly escrow portion upward to catch up. Additionally, if you didn’t send back the refund from the old policy to escrow, you’ll almost certainly have a temporary shortage (because the escrow paid out a year of insurance and only got part of it back). That’s why we emphasize sending that refund in – it keeps your mortgage payment more stable.

• “Will my old insurer or new insurer notify my mortgage company? Do I still have to?”
  Generally, yes, insurance companies will notify the mortgagee (lender) listed on your policy when a policy is canceled or opened. Your old insurer should send a cancellation notice to the lender, and your new insurer will send over a copy of the new policy. However, never assume this replaces your obligation to keep the lender informed. Paperwork can get lost or misfiled, so it’s wise to personally confirm with your mortgage company that they are aware of the change. A quick call or message to verify they have the new policy on record (and have stopped any automatic payment to the old policy) can save you headaches. It’s better they hear it twice than not at all.

• “What if my lender already paid my old insurance premium for the year and I switch?”
  This is common. If you switch midterms, by definition, the lender had paid the full year upfront (since that’s how escrow works). In this case, the unused portion gets refunded. Depending on timing, sometimes the refund check might be issued payable to the lender (since it was their payment) or to you. Either way, those funds should end up back in your escrow. If you get the check, send it to the lender for escrow deposit. Once that’s done, the lender will use escrow to pay the new insurer’s premium (or they may have already when the new policy started). The net effect is just like moving money from paying one insurer to another. You won’t be paying double – you’re just reallocating the funds via that refund.

• “Can switching midterm or having two policies for a few days get me in trouble with my lender?”
  Lenders require you to have one active homeowners insurance policy on the home. As long as there’s no lapse, you’re fine. Having an overlap of a few days (where two policies are in effect) isn’t a problem for the lender; it just means you’ll cancel one and get a refund for those overlapped days. The lender’s concern is that insurance is continuously in force – they don’t mind if you switch, and in fact they see it all the time. Just maintain coverage. If there ever were a lapse (no coverage), the lender can force-place insurance, which is very expensive and not fun. So avoid lapses at all costs by timing your new policy to start when the old ends.

• “Will I lose the escrow money if I don’t send back the refund?”
  You won’t “lose” it per se – it was disbursed to pay your old insurer. If you keep the refund check, you’re essentially holding the money that was meant for insurance. What will happen is your escrow account will show a deficit (because it paid, say, $1,000 to Old Insurance Co., but only got $400 back after cancellation and you didn’t return it). To make up that $600 difference, your lender will likely increase your monthly escrow payments or send a bill for the shortage at escrow analysis time. You’re not being charged twice; you’re just having to replenish the escrow with that money you kept. It’s easier to just put the refund back into escrow now, rather than have your mortgage payment hiked later to recover it. Remember, the escrow funds are your money set aside for your bills – keeping the refund in that account benefits you by keeping your housing payments consistent.

Final Thoughts

Escrow accounts are there to simplify your life as a homeowner by handling big recurring bills like insurance. When it comes to switching your homeowners insurance midterm, it might add a couple of extra steps, but it’s absolutely manageable with a bit of communication. The key takeaways are: always maintain continuous coverage, loop in your mortgage lender about any changes, and ensure any refunded premium finds its way back into your escrow where it belongs. By doing so, you can enjoy the benefits of a better insurance rate or service without any surprises in your mortgage payments.

Changing insurance companies can ultimately save you money or provide better protection for your home. Don’t be afraid to explore your options – even with an escrow account in the mix. With the tips and insights above, Tennessee homeowners can confidently navigate the process, avoid common pitfalls, and make the switch smoothly. After all, it’s your home and your insurance – escrow is just there to help manage the payments. Happy homeowning, and here’s to feeling secure with both your mortgage and your insurance coverage!