Is Homeowners Insurance Included in Your Mortgage? No, But Here's How to Simplify Paying

By Amy Beardsley

Posted on September 13th, 2022

Paying Mortgage and Homeowners Insurance Together | How It's Paid | Cost | Homeowners Insurance vs. Mortgage Insurance | What Else Can You Pay Alongside Your Mortgage Payment? | Combining Homeowners Insurance and Mortgage Payments

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As a homeowner, you take on a long list of bills, from utilities to property taxes, and it can be hard to keep track of where to pay what. Many homeowners ask the question: “Is homeowners insurance included in my mortgage payment?” The answer is technically no.

However, most lenders do require you to carry homeowners insurance for the life of your mortgage loan, and some require you to pay your homeowners insurance through an escrow account.

If you have an escrow account, you’ll pay your lender for mortgage, your homeowners insurance and taxes all in one payment. So it may seem like it’s a part of your mortgage.

Mortgages, escrow, and insurance are complicated topics, and it helps to have an expert on your side. Real estate agents have helped buyers through this process many times, so it helps to have one in your corner.

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When Do You Pay Your Mortgage and Homeowners Insurance Together?

There are two situations in which homeowners insurance and your mortgage are paid together:

  • When the lender requires the use of an escrow account in your loan terms
  • When you want to simplify your housing expenses and ask the lender to bundle your payments

When homeowners insurance and your mortgage payment are paid together, it’s typically because you have an escrow account. Each month when you make a payment, a portion of it is directed to your escrow account, and the lender pays your homeowners insurance and property taxes out of those funds.

What is an Escrow Account?

An escrow account is a separate account your lender maintains to pay the taxes and insurance on your home. If an escrow account isn’t part of your loan terms, you must budget to pay these large expenses yourself.

How Does Escrow Work?

Your lender calculates the total annual property tax and homeowners insurance payments, divides the total by 12, and then adds that amount (your monthly escrow payment) to your mortgage statement.

When you make your monthly payment, the amount that’s included for tax and insurance is deposited into the escrow account. Then, when the tax and insurance premiums are due, the lender pays those bills for you.

Some lenders require extra money in escrow to cover unexpected costs like tax increases. However, they’ll credit any overestimated balances back to you.

How Is Homeowners Insurance Paid?

You pay for your homeowners insurance through either an escrow account or by paying it directly to the insurance company. Your method depends on whether you have an escrow account with your lender.

If You Have an Escrow Account

You’ll pay towards your homeowners insurance monthly, bundled with your mortgage payment. Typically, your lender will pay your homeowners insurance annually out of your escrow account. The insurance company bills your mortgage lender, who then pays it out of your escrow account.

If You Pay It Directly

If you don’t have an escrow account, you pay your homeowners insurance directly to the insurer. Insurance companies usually give you a choice to pay it monthly or yearly.

Monthly payments can be easier to budget for, but insurance companies usually provide a sizable discount if you pay the annual premium up front.

How Much Does Homeowners Insurance Cost?

According to the National Association of Insurance Commissioners (NAIC),the average annual cost of homeowners insurance in the United States is $1,272 – a little more than $100 per month.

Your homeowners insurance cost will vary depending on your home's location, size, value, and level of coverage you purchase. Be sure to call around to multiple insurers to compare quotes. You can often get a better rate by bundling with other types of insurance, like auto.

What’s the Difference Between Homeowners Insurance and Mortgage Insurance (PMI)?

Private mortgage insurance (PMI) and homeowners insurance have very different uses, but it's easy to confuse the two.

Homeowners insurance protects both you and your lender in the event that something happens to your home, such as a burglary or fallen tree. It also includes liability insurance that protects you from legal action if someone should fall or otherwise injure themselves on your property.

Private mortgage insurance, on the other hand, protects your lender if you stop paying your mortgage. Most lenders require PMI if you provide less than a 20% down payment.

Typically, PMI is paid through an escrow account and bundled into your monthly payment if your lender requires it.

What Else Can You Pay Alongside Your Mortgage Payment?

Whether you have an escrow account or not, you may be able to bundle multiple payments to your lender. What is included depends on your mortgage loan program. Most are dependent on whether or not your lender requires them, but you’ll need to pay them separately if you don’t have an escrow account.

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Should You Combine Homeowners Insurance and Your Mortgage Payment?

Because lenders are concerned about lapses in payment that can leave them hanging, many require you to pay property taxes and homeowners insurance along with your mortgage payment each month.

Many new homeowners find it more convenient to pay for everything at once and simplify housing expenses. And, since paying for insurance monthly rather than annually usually costs more, using an escrow account can help you save money.

Paying through escrow is easy because the lender manages those payments for you. All you’re responsible for is your monthly mortgage payment, and the lender handles the insurance and tax bills.

In some circumstances, you can opt out or cancel your escrow account and pay for the taxes and insurance yourself. Whether you have the choice depends on the mortgage type, down payment amount, and equity ratio.

If given the option, homeowners should carefully consider whether it makes sense to combine your homeowners insurance with your mortgage payment. Some lenders charge a fee or higher interest rate if you don’t use an escrow account.

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FAQs about homeowners insurance being included in a mortgage

What is included in a total monthly mortgage payment?

What’s included in your monthly payment depends on your particular mortgage loan program. Some lenders require you to pay into an escrow account, which can include taxes, homeowners insurance, and other required payments. Learn more about what you might be required to pay alongside your mortgage.

Does home insurance come out of escrow?

If you have an escrow account, then yes, your homeowners insurance typically will be paid out of it. Each month when you make a payment, a portion of it is directed to your escrow account, and the lender pays your homeowners insurance and property taxes out of those funds. Learn more about homeowners insurance and escrow.

Is homeowners insurance paid monthly or yearly?

If you don’t pay your homeowners insurance through an escrow account, you can choose if you want to pay it monthly or yearly. If you have an escrow account, you’ll pay your homeowners insurance monthly alongside your mortgage payment.Learn more about paying homeowners insurance monthly versus yearly.

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Posted in Buying a House, Mortgage