Q

Is homeowners insurance included in your mortgage?

A

Not really, but it can be included as part of your monthly mortgage payment if your insurance and property tax payments are escrowed.

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Homeowners insurance is typically required when you take out a mortgage on a house. This ensures your home, and the lender’s investment, is financially protected in the event of unexpected damage or loss. But that doesn’t mean your homeowners insurance policy is automatically included in your mortgage — you’ll need to purchase this coverage separately and provide proof before you close on the home. 

While your mortgage and homeowners insurance are technically separate things, it’s common for home insurance, property taxes, and private mortgage insurance (PMI) to be paid through an escrow account set up by your lender. When home insurance is paid through an escrow account, your policy premium is essentially rolled into your monthly mortgage payment.

Key Takeaways

  • Homeowners insurance is not included in your mortgage — it’s an insurance policy that’s completely separate from your loan agreement.

  • Lenders often require you to pay for home insurance, property taxes, and PMI via an escrow account if your down payment is 20% or less.

  • You generally pay into your escrow account as part of your monthly mortgage payment. The escrow company then pays the insurance company on your behalf. If you don’t have an escrow account, you’re responsible for paying the insurance company directly.

What’s the difference between homeowners insurance and private mortgage insurance (PMI)?

The main difference between homeowners insurance and private mortgage insurance is what they’re designed to protect. 

  • Homeowners insurance protects both you and your lender if something happens to your home, like a fire, break-in, or any other peril covered under your policy. It also includes several types of coverage that aren’t strictly related to your home. If your laptop or bike are stolen while you’re out and about, or you’re held liable for an injury and sued, you can use homeowners insurance to cover the costs. 

  • Private mortgage insurance (PMI) protects your lender if you stop making your mortgage payments. Similar to home insurance and property taxes, PMI is often included in your monthly mortgage payment and paid through an escrow account. Unlike homeowners insurance, PMI is not intended for you or your house — it’s strictly designed to protect the lender if you default on your mortgage.

Most mortgage lenders require PMI if you put down less than 20% on the home. But once you’ve paid off enough of your mortgage to where you now have at least 20% equity in the home, you’ll likely be eligible to cancel PMI. Check with your lender to find out how to drop your private mortgage insurance coverage. 

Homeowners insurancePrivate mortgage insurance (PMI)
Who is it designed to protect?Both you and your mortgage lenderYour mortgage lender
What does it do?Protects your home, belongings, and personal liability from expensive damage or lossProvides a financial safety net for your lender in case you stop paying your mortgage
When is it required?For as long as you have a mortgageGenerally required if your down payment is less than 20%
Is it included in my mortgage?It's not part of your mortgage, but its often paid as part of your mortgage payment via an escrow accountIt's not included in your mortgage, but it may be paid as part of your mortgage payment via an escrow account

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When is homeowners insurance included in my mortgage?

While homeowners insurance is never actually included in your mortgage, it can be added to your mortgage payment through an escrow account set up by your lender. It’s estimated that around 80% of mortgage borrowers pay their home insurance and property taxes through an escrow account, according to a 2017 analysis from CoreLogic. [1]

If you take out a mortgage on a home and your down payment is less than 20%, most lenders will require you to pay for homeowners insurance through one of these accounts — which you pay into as part of your monthly mortgage payment. Depending on your mortgage lender and loan agreement, you may also be required to purchase private mortgage insurance as well.

If your down payment is more than 20%, your lender likely won’t require you to have an escrow account. In this case, you may have the option of opting into an account or paying for homeowners insurance and property taxes directly. 

Mortgage escrow example

Say you have a $1,500 monthly mortgage bill. A portion of your payment — say, $1,000 — will go toward paying off the principal and interest on your loan. The remaining $500 will be your escrow payment, which will be deposited into your escrow account for your agent to pay your home insurance, property taxes, and PMI each month.

Should I pay for homeowners insurance through escrow?

If you’re buying a house for the first time, the concept of an escrow account may come off as a little confusing. Wouldn’t it just be better to pay your insurance and property taxes yourself? Not necessarily. Here are a few advantages:

  • One convenient payment. Some of your most important homeownership expenses are consolidated into one convenient payment, so you’re not risking missing a due date here or a final notice there. 

  • Lower insurance premiums.  Premiums are generally paid for the year up front when they’re included in your escrow — and usually at a reduced rate. Otherwise, if you pay the insurance company directly, you’ll need to pay the entire yearly premium yourself if you want to be eligible for a lower rate. 

  • Fairly hands off. You don’t need to deposit money into your escrow account like a personal checking account. Instead, the account is funded by the monthly escrow payment you make as part of your larger monthly mortgage payment. When your insurance and taxes are due, an escrow agent will pull the funds from your account and distribute to the necessary parties on your behalf.

Frequently asked questions

Can you have a mortgage without homeowners insurance?

Lenders assume a good deal of financial risk when extending you a loan, which is why most require homeowners insurance to ensure their investment is protected. If your house is uninsured and it burns down, odds are you aren’t going to be paying that mortgage anymore. Lenders require home insurance to prevent such a scenario.

Is homeowners insurance included in escrow?

If you set up an escrow account with your lender, you’ll likely be able to pay for property taxes, private mortgage insurance, and homeowners insurance in a single escrow payment attached to your monthly mortgage bill.

Is the first year of homeowners insurance included in closing costs?

Yes, before closing on a mortgage, most lenders will likely require you to pay for the first year of homeowners insurance up front. If you’re paying for home insurance via escrow, it’s possible that you’ll only have to pay a portion of the annual premium at closing.

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