Over 12 years writing about insurance and personal finance
Emily is a Plutus Award-winning freelance writer and former educator who makes complex financial topics easy to understand. She specializes in the science behind money habits and has written for outlets like The Huffington Post, Business Insider, and The Washington Post.
Sara Getman is an Associate Editor at Insurify and has been with the company since 2022. Prior to joining Insurify, Sara completed her undergraduate degree in English Literature at Simmons University in Boston. At Simmons, she was the Editor-in-Chief for Sidelines Magazine (a literary and art publication), and wrote creative non-fiction.
Outside of work, Sara is an avid reader, and loves rock climbing, yoga, and crocheting.
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Buying a house has a number of recurring costs, including your mortgage and homeowners insurance premiums.
The mortgage is the loan you took out to purchase your home, which you pay back in monthly installments, typically for a 30-year term. Homeowners insurance is an insurance policy that pays to replace or repair damage to your home or personal property in the event of an unexpected loss.
Homeowners insurance isn’t the same as mortgage insurance, which protects the lender in case you can’t pay. Mortgage insurance is generally only required if you make a down payment of less than 20%.[1]
While homeowners can pay their homeowners insurance premiums directly to the insurance company, many mortgage lenders offer the option of an escrow account, which is a reserve account for the funds used to pay your home insurance policy and property taxes.
Here’s what you need to know about how homeowners insurance may be part of your monthly mortgage payment.
How homeowners insurance works with a mortgage
No laws require homeowners to carry a home insurance policy. But just because homeowners insurance products aren’t legally required doesn’t mean this coverage is optional.
If you have a mortgage loan, your lender will require you to carry home insurance because the lender wants to protect the property from financial loss.
Since your lender requires you to carry home insurance, it wants to make premium payments as easy as possible. That’s why most lenders offer borrowers an escrow account with which to handle homeowners insurance payments. With an escrow account, you’ll make a monthly payment, including your mortgage and a portion of your home insurance premium. Your lender will pay the insurer directly when your home insurance premium comes due, typically once a year.
Borrowers who buy a house with a Federal Housing Administration (FHA) loan must establish an escrow account with the bank or mortgage servicer handling the loan. Additionally, if you put less than 20% as a down payment on a conventional loan, your lender will typically require you to open a mortgage escrow account and make your home insurance payments via escrow.
Many bills, including homeowners insurance and property taxes, are paid annually. Since you pay your mortgage monthly, you’ll pay 1/12 of your annual home insurance and property taxes to your escrow account.
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What’s included in a mortgage payment
Your mortgage payment includes several components, including:[2]
Principal
This is the money you borrowed to purchase your home. For example, if you borrowed $200,000 to purchase your home, this is your principal amount. Each monthly payment pays off a small portion of the principal.
Interest
Expressed as a percentage of the amount borrowed, interest is the cost of borrowing money. Each monthly payment will include an interest payment based on the remaining principal. Your credit history can affect your interest rate.
Escrow
If you open an escrow account, your mortgage payment will include a monthly escrow payment that will be held in reserve for various annual costs, including:
Homeowners insurance premium: You’ll pay 1/12th of your annual home insurance premium with each mortgage payment, and your lender will make the premium payment on your behalf.
Property taxes: Typically, you’ll also pay 1/12th of your annual property taxes with your monthly mortgage payment, and your lender will pay the taxes on your behalf when they come due.
Private mortgage insurance (PMI): If you pay mortgage insurance because your down payment was less than 20%, you’ll pay 1/12th of your annual PMI premium with your monthly mortgage payment. This insurance protects the lender’s investment rather than your investment in the home. Your lender pays this premium on your behalf with the money set aside in escrow.
Homeowners association (HOA) fees
If you’re a member of a homeowners association, you’ll pay your HOA fees as part of your monthly mortgage payment.
Choosing a home insurer with an escrow
You still have complete control over what home insurer you choose even though your mortgage company pays your premium through your escrow account. That’s because your current policy is still in your name even though the payments are made through the escrow account.
This means you can shop for a new policy, adjust limits, and take advantage of discounts for bundling, security, and affinity groups. You’re still the owner of the insurance policy, and you have every right to make adjustments and changes as you see fit even though your lender makes the payments. Your lender can set minimum coverage requirements for your homeowners insurance policy, but you otherwise can make whatever home insurance and financial decisions that work for you.
Pros and cons of including insurance in your mortgage payment
Including insurance in your mortgage payment has its benefits and drawbacks. Here’s what you should consider:
Pros
Convenience: You make one monthly payment instead of multiple.
Peace of mind: Since your lender pays your insurance on your behalf, you don’t have to worry about missing a payment date and accidentally letting your coverage lapse.
Cons
Fees: You have to pay escrow account management fees. These fees tend to be minimal but add to your expenses.
Under or overpayment: You may under or overpay your escrow if you make a mistake in calculating how much you need to pay monthly for your annual costs. If you underpay, you need to pay the difference. If you overpay, your lender generally cuts you a check for the overpayment.
How to know if your mortgage payment includes insurance
You have several ways to determine if your mortgage payment includes homeowners insurance. To start, you can take a look at your most recent mortgage statement. Under the current payment due section, there’ll be information about the amount going to principal and interest, and, if you have an escrow account, the amount going to escrow.
You’ll also receive an annual escrow account review, which tells you how much you’ll pay into the account over the coming year and how much the lender expects to pay for taxes and insurance.[3]
Your lender can also discuss your mortgage account if you have questions or want to add an escrow account. Call your lender during business hours for more information about your current policy.
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What’s included in an escrow account?
An escrow account is a type of reserve account used to help homeowners more easily budget their annual costs, like home insurance, private mortgage insurance, and property taxes.
If you have an escrow account through your mortgage lender, your monthly mortgage payment will include an escrow payment equaling 1/12th of the total annual cost of insurance and property taxes. The lender uses the money in escrow to pay your insurance premium and taxes when those bills are due.
Some lenders require homeowners to make escrow payments. Lenders require borrowers who make a down payment of less than 20%, and borrowers with FHA loans, to have an escrow account. Escrow accounts aren’t mandatory for any borrower who made a down payment of 20% or more on a conventional loan. They can decide whether or not they prefer to include escrow in their monthly mortgage payments.
Homeowners insurance and mortgage FAQs
If you’re trying to decide if you want to include homeowners insurance in your monthly mortgage payment, consider the following questions to help you make the best choice for your financial situation.
Will your mortgage company pay your insurance premiums?
If you opt to have homeowners insurance paid into an escrow account, your mortgage company will handle the payment of your insurance premiums when they’re due. The mortgage company will use the money in escrow to make the necessary payments.[4]
Do you have to pay homeowners insurance through escrow?
No. Homeowners aren’t required to pay homeowners insurance through escrow. You can pay your homeowners policy directly to your insurance company.
What happens if your mortgage lender misses your insurance payment?
Your mortgage lender is legally required to make timely payments of insurance and taxes if you maintain an escrow account and make regular deposits into it for these expenses. If the lender misses your insurance payment and your policy is canceled, the lender must contact the insurer and have the policy reinstated or purchase a policy from another insurer on your behalf.
What are the benefits of having homeowners insurance included in your mortgage payment?
Including your homeowners insurance payment with your monthly mortgage payment can help streamline your bills. By putting homeowners insurance payments into escrow when you make your monthly mortgage payments, you can ensure that you never miss an insurance payment and never have to worry about a lapse of coverage.
Ask your mortgage lender for more information on what’s best for your policy.
Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson.
Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online.
She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy.
Emily lives in Milwaukee with her family.
Emily has been a contributor at Insurify since October 2022.
Sara Getman is an Associate Editor at Insurify and has been with the company since 2022. Prior to joining Insurify, Sara completed her undergraduate degree in English Literature at Simmons University in Boston. At Simmons, she was the Editor-in-Chief for Sidelines Magazine (a literary and art publication), and wrote creative non-fiction.
Outside of work, Sara is an avid reader, and loves rock climbing, yoga, and crocheting.
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