Is Homeowners Insurance Paid Through Mortgage

Aug 26, 2022 | Mortgage Guides

Homeowners insurance is often another expense attached to one’s mortgage payment, joining a list of others. Consolidating several bills into one can make for easier financial management, yet everyone must consider what works best for them. 

The following guide examines different ways to pay for homeowners insurance, determines whether including it in the mortgage payment is worth it, and answers homebuyers’ frequently asked questions. 

What Is Homeowners Insurance?

Two types of property insurance are often necessary when purchasing a house: homeowners insurance and private mortgage insurance. While no laws mandate homeowners insurance, almost every financier requires it as protection before financing a loan. 

A standard policy combines various insurance protections to provide coverage for property damage to the home’s structure and belongings and liability for damage and injuries to other individuals.

Homeowners’ insurance is helpful when destructive events occur, such as a fire or loss of possessions due to burglary. Other types of property insurance, such as flood and earthquake insurance, are voluntary depending on one’s location. A policy should meet each homeowner’s specific needs and wants.

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Homeowners Insurance vs. Private Mortgage Insurance

How homeowners insurance contrasts with private mortgage insurance is in who and what they protect. Despite the borrower paying for private mortgage insurance (PMI), it is the lender that receives protection. Contrary to homeowners insurance, PMI does not protect the property but covers the lender’s financial loss if the borrower defaults on payments.

Mortgage lenders often require PMI if one’s down payment is less than 20 percent of the home’s purchase price. In most cases, PMI gets included in the same escrow account as the property taxes and homeowners insurance. Borrowers should be able to cancel this policy once they pay enough of their mortgage to reach 20 percent equity–depending on the type of loan and the lender.

How Is Homeowners Insurance Paid?

The majority of homebuyers pay for this insurance through their monthly mortgage payment. An escrow account is needed, which is often the same method used for paying property taxes. The mortgage lender will use this separate account to make your payments each month. 

An escrow benefits both sides—fewer bills for the borrower and peace of mind for the lender. While some borrowers have to include homeowners insurance, others don’t. Like PMI, the lender might require an escrow if the borrower is unable to put down 20 percent or more. 

Other options are available with making a down payment that size or larger. Most folks who opt out of using an escrow account choose to pay their insurance at once or be in control of when payments get scheduled.

Does a Mortgage Payment Include Homeowners Insurance?

A mortgage payment covers several aspects of homeownership. Borrowers can divide it into four parts: principal, interest, taxes, and insurance (PITI). To determine if homeowners insurance is included in the mortgage payment, let’s examine what PITI entails.

  • Principal: The total amount borrowed is considered the mortgage’s principal. This amount gets paid off over time, with part of each loan payment going toward it. 
  • Interest: Interest accrues monthly over the loan’s lifespan. Part of each payment covers the interest amount since the last bill.
  • Taxes: Local governments often require homeowners to pay property taxes, which are a portion of the payment for the entirety of the loan.
  • Insurance: Homebuyers may need several types of insurance depending on their mortgage.
  • Homeowners Insurance: This policy protects the home from unexpected incidents, such as fire damage, wind damage, burglary, vandalism, and liability lawsuits.
  • Mortgage Insurance: Protects the lender from financial loss if the borrower defaults. The PMI requirement is based on the borrower’s down payment amount.
  • Other Insurance: Depending on location, additional policies may be necessary. Examples include earthquake, flood, and hurricane insurance.

When Is It Best to Include Homeowners Insurance In the Mortgage

Lenders want to ensure borrowers pay their insurance premiums because missed payments could jeopardize their investment. That is why many lenders require an escrow account. Unfortunately, depending on the mortgage type and down payment, qualifiable borrowers may opt out of an escrow account and pay it themselves.

Conventional lenders offer escrow waivers to those with considerable home equity or have a strong track record of on-time payments, as they pose the least risk. As for government-backed loans, VA lenders vary with their requirements, while FHA lenders often require an escrow throughout the mortgage’s lifespan.

Many folks favor using escrow to pay for their homeowner’s insurance even when not necessary. Financing through modest monthly payments is often more manageable than extensive annual or biannual payments. In some circumstances, choosing not to use an escrow account can result in higher interest rates and additional fees.

What Happens if the Mortgage Lender Does Not Pay the Home Insurance?

A mortgage company is legally responsible for paying home insurance premiums if an escrow account is in place and the borrower makes on-time mortgage payments. 

Nonetheless, blunders can occur. If you suspect the mortgage provider missed a payment while the policy is current, contact them immediately and request they correct the issue. It is sometimes necessary to send a “notice of error” to the lender so they can make proper adjustments and pay the associated costs.

If a homeowners insurance policy is canceled due to nonpayment, reinstatement is an option after paying the past-due balance. If this occurs after the policy has expired, consider contacting a lawyer, as it may indicate that the lender did not pay the insurance premiums. 

Frequently Asked Questions

Do lenders require homeowners insurance to be paid at closing? 

The initial premium for homeowner’s insurance is often included in the mortgage closing costs. This amount varies from a month’s worth to an entire year’s worth. After collecting the first term of a homeowners insurance policy, lenders deposit the funds into an escrow account for future billing cycles. Who pays for this expense at closing, the borrower or the lender, varies on a case-by-case basis. 

Does a homeowners insurance policy have to be paid through an account escrow?

An escrow account is standard for paying home insurance through the mortgage company. While escrow is not mandatory, and borrowers can often forgo it by paying for their insurance upfront, many lenders insist on using it. That is common for homebuyers to make down payments of less than 20 percent of the purchase price. With an escrow account, lenders receive assurance that their borrower’s insurance payments get made on time.

Is it necessary to pay homeowners insurance in advance?

Depending on the company, paying homeowners insurance in advance is often required. Many lenders include the insurance policy with the rest of the borrower’s closing costs. In that case, an escrow account in the borrower’s name is pre-funded with the money upon closing the mortgage. Even without an escrow account, paying the initial term of home insurance in advance is standard.

When is home insurance due?  

Homeowners can pay for their insurance policy on several schedules. Yet, a deciding factor comes down to how it is paid. With an escrow account, lenders often require insurance payments to be made every year. Those who bypass an escrow account can choose monthly, quarterly, semiannually, or annually.

Does refinancing require changing home insurance companies?

When refinancing a mortgage, homeowners can retain their existing insurance provider or are free to explore other options. Alas, this choice often depends on whether they use their previous lender. A new lender could require more coverage for one’s policy. Consider the requirements of each lender and compare rates while searching for a new mortgage, in particular, if coverage needs have changed.

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