What Is an Escrow Account? Your Guide to Mortgagee Billing

Oct 29, 2021

When you purchase a house, the paperwork is staggering. And when it comes time to pay, there seems to be an endless number of people on the receiving end of your checks. A financial institution, the government, realtors, the list goes on.

To make life easier, mortgagee billing exists. In this article, we define mortgagee billing and escrow accounts, explain how it all works for insurance, and show you how to switch insurance policies mid-term.

What is mortgagee billing?

Mortgagee billing refers to the situation in which a mortgage lender (usually a bank or credit union) pays for the homeowner’s, or borrower’s, insurance premium through an escrow account. You may also see this referred to as escrow billing.

What do I need to set up mortgagee billing?

In order to set up mortgagee billing with your insurance company you will need a few pieces of information.

        •The mortgagee clause

        •The loan number

        •Optional: An email or fax number so your insurance agent can send policy documents.

If you already have your policy set up on mortgagee billing, the mortgagee clause and loan number will be listed on your policy declarations page. If it is a new purchase, your lender will be able to provide that information. Be aware that the mortgagee address is usually a different address than where you send your checks.

What is an escrow account?

An escrow account is similar to a savings account, but it is managed by your lender (your mortgage provider). When you close on your new property, your lender will estimate how much you will owe for yearly property taxes and insurance. That total is divided up and added into your monthly mortgage payments. 

Note: This is an estimated total and you may owe more money at the end of the year. We always recommend having savings on-hand if you do receive a bill at the end of the year.

Why choose mortgagee billing?

In some cases, you may not have a choice as to whether you use mortgagee billing or not. If you are using a mortgage lender and have less than a 20% down payment, your lender will likely require you to use an escrow account.

Benefits of having an escrow account

Mortgagee billing makes life easier for all parties involved. Some benefits for you are:

        •An escrow account may help you budget your money. By paying monthly, you don’t need to make large annual payments for taxes and insurance.

        •The lender generally takes care of paying your hazard insurance and property taxes. Without an escrow account, you’d be on the hook for paying for these individually.

Mortgagee billing FAQs

Now you know what mortgagee billing is. And chances are, if you have a mortgage, you’ve been using mortgagee billing anyway. While you have little control over your property taxes, your landlord insurance is completely up to you (as long as you are sufficiently covered). You likely have some specific questions regarding insurance and your escrow account, so let’s dive in.

How does mortgagee billing work for my new purchase?

Congrats on the new property! For a new purchase, you’ll need to choose a new insurance carrier and send a declarations page to your lender.

During the closing process of your property, your carrier will inform the client and lender at the closing of the total premium. At the closing, it’s the title company who cuts the check and sends it to your carrier, usually by mail.

How can I switch carriers before my policy period ends?

Say you find a better policy, either because it’s more affordable or provides better coverage. You’re halfway through your current insurance policy, but don’t know how the cancellation and refund process works. 

The first step you’ll want to take is to reach out to your current insurance company. Let them know you’d like to cancel and ask if they have any specific steps you need to take to get a refund for your unused policy.

We highly recommend signing a new policy before canceling your old one or at least making sure you are canceling your old policy on the same date your new policy starts. Any lapse of coverage could result in you paying more to your lender, who may put forced placed insurance on your property during any lapse.

Once you cancel your old policy, your insurance company will typically send the refund of an unused premium directly to you. Since your lender pays for the premium up-front out of escrow, you’ll want to check with them regarding any outstanding balance on your escrow account. Since the lender pays for your new policy, they’ll want a refund to be reimbursed in your escrow account, otherwise you can expect a higher escrow payment next year.  

What happens if I don’t tell my lender?

If you are switching policies midterm, you will need to tell your lender. If you forget, your lender will assume you are not covered at all and will put forced-place insurance on your property.

While your new insurance company will send documentation to your new lender via mail or email. It is always important for you, the client, to inform the lender that you are switching insurance policies as they may have a specific website, email, or fax number you or your insurance company would need to send documents to to make sure the policy gets paid.

What is forced-place insurance?

Forced-place insurance is insurance your lender will automatically enroll you in if your current coverage lapses or if they deem the coverage to be inadequate. Forced-place insurance is usually much more expensive than a traditional policy so we recommend avoiding it at all costs

If you are put on forced-place insurance even though you have other coverage, you can call your lender and let them know as soon as possible. They should backdate to when your new coverage started.

What if my loan gets sold?

This is a common situation. Lenders make money by selling your mortgage loan to other companies. If this happens, don’t panic. Your mortgage and insurance premiums will stay the same. Once your loan gets sold, your new lender should reach out to your insurance company.

Sometimes this doesn’t happen, or the new lender sends something to the client (you) to do, like forwarding over documentation or contacting your insurance provider. It’s important that you pay attention to anything your new lender sends you or asks of you.

What happens if my premium changes?

Your insurance premiums may change on an annual basis. If this happens, you may owe more money at the end of the year. Your lender will increase your escrow payment as needed to cover the additional cost – this applies to any increase in taxes too. And, in the case that you are overpaying, you’ll get a refund for any extra money in your escrow account.

It’s the end of my policy term. How do I renew?

If you are staying with your carrier, this one is easy. Your carrier is required by law to send a renewal notice to both you and your lender. Your carrier will bill your mortgage lender and the lender uses your escrow money to renew the policy. Then, the cycle of escrow continues where you make monthly payments that are used to pay off this premium over the course of a year.

Your one stop shop for landlord insurance

Still have questions as you look to close on your property or switch carriers? We’ve got your back. Obie offers a streamlined process to getting a new quote on your rental property. Our team is on-hand to answer your questions and help you save time on insurance shopping. Let us do the hard work for you. Start your Obie quote today or reach out to our team with questions.