How Homeowners Insurance Works With Your Mortgage and Escrow

If your home insurance is paid through escrow, your mortgage and your policy are closely linked. Understanding how they work together helps you avoid surprises in your monthly payment.

Why your lender requires home insurance

Your home is the collateral for your loan, so your lender requires enough home insurance to rebuild it. They are listed as mortgagee on the policy and are notified of changes or cancellations. See what mortgage lenders require.

What is an escrow account?

An escrow (or impound) account is held by your lender to pay your property taxes and home insurance. Instead of paying the insurer directly, you pay one-twelfth of the annual cost each month, and the lender pays the premium when due.

How escrow pays your insurance

Each year the lender estimates your taxes and insurance, divides by twelve, and adds it to your mortgage payment. When the policy renews, the lender pays the premium from escrow. You will receive an annual escrow analysis showing the math.

What happens when rates rise

When your insurance premium goes up, your escrow can run short. The lender then raises your monthly payment to cover the higher cost and make up the shortage. This is why a rate increase often shows up as a bigger mortgage payment.

Switching insurers when you escrow

You can still shop and switch with an escrow account. Buy the new policy, send proof to your lender, and they will pay the new insurer from escrow. Always confirm the lender has the new policy so there is no lapse, and see how to switch without a gap.

Escrow shortage versus surplus

Each year your lender runs an escrow analysis. If taxes or insurance rose, you may have a shortage, and the lender raises your monthly payment and may bill the difference. If costs fell, you get a surplus refund. Reviewing this analysis tells you exactly why your payment changed.

Can I pay my own insurance instead of escrowing?

Some borrowers can waive escrow (often with at least 20% equity) and pay taxes and insurance themselves. It gives you control but requires discipline to set money aside. Either way, your lender still requires proof of continuous coverage.

What if your lender pays the wrong amount or insurer?

Escrow mistakes happen, especially right after you switch insurers. Send your lender the new policy and the cancellation of the old one, and confirm in writing which insurer they will pay so you are not double-charged or left with a lapse.

What happens to escrow when you pay off your mortgage

Once your loan is gone, the escrow account closes and any balance is refunded. From then on you pay your property taxes and home insurance directly. Set a reminder for the renewal date so coverage never lapses, and keep shopping your rate, since you no longer have a lender prompting an annual review.

Related reading: signs it is time to shop and Illinois home insurance.

Work With Pro Insurance Group

Pro Insurance Group is an independent agency based in Elgin, Illinois, serving homeowners and families across the state and 40+ states nationwide. We compare 20+ A-rated carriers, re-shop your policy at every renewal to keep your rate competitive, and tailor coverage to your needs. No agency fees, ever.

Call 833-776-4671 or text "quoteme" to 312-878-9416.

Frequently asked questions