Is homeowners insurance included in your mortgage?

Most borrowers pay for homeowners insurance through an escrow payment on their monthly mortgage bill. The escrow payment is allocated to pay your property taxes and homeowners insurance.

Kara McGinley

Kara McGinley

Published November 17, 2020

KEY TAKEAWAYS

  • Homeowners insurance payments are included in your mortgage when paid through an escrow account

  • You may be required to have an escrow account if you put down less than 20% on your home

  • Escrow accounts make it easy for borrowers to make one single monthly payment to pay off their loan, insurance, and property taxes

When you take out a mortgage, you make monthly payments to your lender to pay off the loan. When you purchase homeowners insurance, you pay monthly or annual premiums to your insurance company in order to keep your policy in force. Although your insurance premium and mortgage payment are technically paid to two separate entities, they’re combined into one mortgage payment when you pay for your homeowners insurance and property taxes through an escrow account.

If you have an escrow account, you make a single monthly payment to your lender; a portion of this payment goes toward paying off your mortgage, and the other goes into your escrow account which pays for various homeownership obligations like homeowners insurance, property taxes, and private mortgage insurance.

Escrow accounts are convenient for borrowers since you’re paying for everything in one payment rather than having to worry about multiple bills. Most lenders require you to pay for insurance and taxes through an escrow account if your down payment is less than 20%.

How can I include homeowners insurance in my mortgage?

Homeowners insurance is included as part of your monthly mortgage payment if you have an escrow account that you pay into. Around 80% of borrowers pay their insurance and taxes through an escrow account, according to a 2017 analysis from CoreLogic.

You don’t deposit money into an escrow account like you would a bank account. The payment funding the account is simply added to your monthly mortgage payment. Your monthly mortgage bill includes the principal payment, interest payment, and an escrow payment that pays for homeowners insurance, property taxes, and private mortgage insurance. When your insurance and taxes are due, an escrow agent will make the payments to the necessary parties on your behalf.

Take the following example of a $1,500 mortgage bill. A portion of your payment will go toward paying off the principal and interest, say, $1,000, and the remaining $500 will be your escrow payment. The escrow payment is deposited into your escrow account and the agent takes care of the rest.

Escrow accounts can be beneficial for both you and your lender because you only have to make one payment instead of multiple, and your lender knows you are making good on all of your required payments that are associated with your home. If you’re someone who likes to keep your finances simple and would prefer to be more hands-off, escrow accounts are a smart option.

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Does homeowners insurance have to be included in my mortgage?

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 an escrow account. You’ll likely be required to purchase private mortgage insurance as well.

Putting down less than 20% on a home signals to lenders that you’re more high-risk than a borrower with a lower loan-to-value ratio, which is why you may be required to purchase PMI and pay for insurance through an escrow account. By requiring you to pay into an escrow account, lenders can be sure that homeowners insurance is being paid for and their financial investment is protected.

If your down payment is more than 20%, your lender may not require you to pay for homeowners insurance through an escrow account. You can instead pay your homeowners insurance directly to your insurer if you prefer.

Why do mortgage lenders require homeowners insurance?

Lenders take on financial risk when extending you a home loan, which is why most require homeowners insurance to ensure their financial investment is protected. If you don’t have homeowners insurance and your home is demolished by, say, a tornado, odds are you aren’t going to have the money to pay back your loan.

Most lenders will require you to insure your home up to its replacement cost. Lenders realize a typical homeowner won’t be able to pay for a rebuild out of pocket, but unfortunately if your home is destroyed, your loan payments don’t disappear.

Having homeowners insurance may be required by lenders, but it is actually even more beneficial for homeowners.

Insurance Editor

Kara McGinley

Insurance Editor

Kara McGinley is an Insurance Editor at Policygenius. She previously worked as a freelance writer and a copywriter for various startups. Her work can be found in Teen Vogue, The Culture Crush, and more.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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