Buying a home can be an exciting and overwhelming process. When all the paperwork’s been signed, you’ve moved in, and the dust has settled, you may be thinking twice about your choice in homeowners insurance. How soon after you buy your home can you switch insurance providers, what happens to the money you may have prepaid, and what does your lender need to know?
A common misconception is that switching insurance is a complicated process. Buyers typically pay the entire annual premium for their insurance when they close on the house, and people sometimes mistakenly believe they have to wait until their policy is up for renewal to switch.
When you buy a home, loan documents will generally require you to have homeowner’s insurance in place during the life of the loan. The good news is that you can switch insurance carriers at any time if you find a better insurance deal. If you decide to switch carriers, you may have to prepay the new insurance carrier for a full year’s worth of insurance coverage. The old insurance carrier will end up sending you a check for the unused insurance coverage a week or two after the termination of the first insurance carrier’s coverage. You’ll want to make sure you don’t end up with a gap in the insurance coverage between the time you cancel the old policy and the new one becomes effective. It should happen on the same day.
You’ll need to contact your mortgage lender to make sure that the new insurance carrier has the right language on the insurance certificate for the lender’s coverage. You’ll also want your lender to have the insurance carrier’s information so that the lender can pay future insurance bills from any escrow set up with the lender.
Find a new provider
If you do decide to switch insurance after buying a house, your first step is to find a new provider. You can search for potential insurers and request quotes. Dennis Burke, insurance agent at Liberty Mutual, explains that once you choose a new company, your new agent will notify your mortgage company of the change and update the policy.
“Consumers often think they don’t have the time to switch insurance right now, thinking it will be a long process,” Burke says. “From the point a customer contacts me to having the policy in effect, I’d say the quickest turnaround I’ve had this processed in is 30 minutes.”
Cancel the insurance
Once you find your new insurance provider, you can cancel your current policy simply by contacting the original provider, Burke says.
“In some states an agent cannot legally cancel the current policy, so the individual typically has to authorize the cancellation,” he says. “You can cancel by phone or by sending a letter to the company, and it’s important to do this on the day the new policy goes into effect.”
Although your original insurer might be aggressive in trying to keep your business, you are typically not required to stay with the company. If you are owed money such as any prepaid premiums, Burke says, you should receive a check within a week. If this does not happen quickly, he explains that the policy may not have been cancelled, so it’s best to call and confirm your cancellation with the company.
What about escrow?
When you make your monthly mortgage payment to your lender, a portion is applied to the principal, which is earmarked to pay off your house, and part goes to the interest due on the loan (a portion may also be homeowners association dues). The other chunk of your monthly payment is usually set aside in escrow to pay for taxes and insurance when they are due to be paid.
Each year, your lender will evaluate the amount due for taxes and insurance and may adjust the monthly amount you pay based on changes in the tax assessment and/or insurance premiums.
Most mortgage lenders will require escrows for the payment of real estate taxes and homeowner’s insurance premiums. Generally, if you have put down less than 20 percent down towards the purchase of a home, you will be required to have these escrows. Most lenders require tax and insurance escrows, particularly if you have put down 20 percent or less towards the purchase of a home. In some unique situations, lenders may waive the escrow requirements, but the lender may require a much larger down payment on the home or a fee to waive the escrows.
Notifying your lender
Giles and Burke agree that you may want to consider contacting your lender, as well as your insurance agent, if you authorize an insurance policy change. Your new insurance provider will bill the mortgage company, asking for payment of the new policy, Giles says.
“You want to make sure you have enough escrow in your account to make payments,” Burke says. “This might require you to put it all back into the escrow account so you’re not short. Your house payment could go up, so once you receive your refund check, contact your lender and ask them if it’s OK to use it, or if you should put it back into your escrow.”