A mortgage agreement and a homeowners insurance policy are completely separate contracts from different entities. But if you have an escrow account, you'll likely pay for home insurance, property taxes, and private mortgage insurance (PMI) as part of your monthly mortgage payment.
When you take out a mortgage on a house, your lender will require you to purchase homeowners insurance to protect their investment.
If you have an escrow account, your home insurance premiums are included in mortgage payments, along with PMI costs and property taxes.
Lenders often require you to pay your insurance premiums, property taxes, and mortgage insurance fees through an escrow account if your down payment is 20% or less.
Once you've reached 20% equity in the home, you may be able to get rid of your escrow account. Once you cancel escrow, you'll pay your home insurance premiums directly to the insurer.
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What is included in a mortgage payment?
Your mortgage payment often includes money for the principal, interest, property taxes, and insurance.
Principal: This is the amount you still owe on the mortgage. The principal balance decreases over time as you pay the loan.
Interest: This is the amount you pay your lender each month for extending you the loan.
Property taxes: The amount that you pay to your local government.
Mortgage insurance: You're generally required to pay for private mortgage insurance if your down payment is less than 20%, and you generally stop paying PMI once you've established enough equity in the home.
Homeowners insurance: Your lender will require you to pay for home insurance and keep the house insured throughout the life of the loan. This is to protect you and your lender from major financial loss in the event the house is destroyed by a disaster.
Catastrophe insurance: In addition to home insurance, your lender may also require flood insurance or wind-only insurance if your house is in a high-risk flood zone, coastal community, or an area prone to tornadoes or hailstorms.
Paying your premiums as part of your mortgage doesn't make home insurance cost more or less, and you can change providers at any time if you shop for homeowners insurance and find a better deal (which would ultimately lower your monthly mortgage payment).
However, your lender may charge you an amount in excess of what you'd pay for home insurance and taxes if you made these payments yourself directly. Lenders often do this to avoid an escrow shortage and potential lapses in home insurance coverage, but if your account has a certain amount of excess funds (like $50) you may be entitled to a refund.
Learn more >> How does home insurance and escrow work?
What’s the difference between homeowners insurance and private mortgage insurance?
The main difference between homeowners insurance and private mortgage insurance is what they’re designed to protect.
What is homeowners insurance?
Home insurance protects you financially if your home is damaged or destroyed in a fire, severe storm, or any other peril covered under your policy. It also includes personal property coverage for your belongings, and liability protection for your assets if you're sued because of an accident.
For example, if your laptop or bike are stolen while you’re away from your home, or you’re held liable for a guest's injury on you property and sued, homeowners insurance can help cover the costs. Without home insurance, you'd be responsible for paying these expenses out of your own pocket.
Learn more >> What does home insurance cover?
What is private mortgage insurance?
Also called PMI, private mortgage insurance 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.
Homeowners insurance vs. private mortgage insurance
Private mortgage insurance (PMI)
Who is it designed to protect?
Both you and your mortgage lender
Your mortgage lender
What does it do?
Protects your home, belongings, and personal liability from expensive damage or loss
Provides 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 mortgage
Generally 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 account
It's not included in your mortgage, but it may be paid as part of your mortgage payment via an escrow account
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. 
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 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:
Fewer late or missed payments. 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.
More convenient than paying yourself. 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.
Paid-in-full discounts are more accessible. Premiums are often paid for the year up front when they’re included in your escrow — and usually at a reduced rate via a paid-in-full discount. While you're also eligible for this discount if you pay the insurance company directly, there's an obvious advantage to not have to front an entire year's worth of premiums yourself.
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.