Is Homeowners Insurance Included in a Mortgage?

Home insurance is included in your mortgage payments through an escrow account, which most lenders require. Your mortgage servicer manages this escrow account and uses it to pay annual or biannual expenses like property taxes and insurance on your behalf. This simplifies your housing expense management.

With an escrow account, expenses for principal, interest, taxes and insurance are combined into one monthly payment. The lender or loan servicer prorates these expenses and adds them to your mortgage payment. Paying your property taxes and home insurance disbursements through escrow keeps your premiums current and your lender's investment secure. Your lender analyzes your escrow account annually to ensure you're paying the correct amount. If your insurance costs increase, your monthly payment adjusts accordingly.

You'll encounter two types of insurance when buying a home: homeowners insurance and mortgage insurance. Mortgage insurance (PMI) protects your lender if you default on the loan. Homeowners insurance protects you from financial losses due to damage to your home and belongings.

The homeowner or borrower purchases both types of insurance. Below are the key differences:

Most lenders require you to pay the first year of homeowners insurance at closing. This ensures coverage begins immediately and protects both you and your lender from financial loss if damage occurs. Some lenders allow you to pay this through escrow instead of upfront at closing.

If you cancel your home insurance without notifying your lender, they may add force-placed insurance to your escrow. Force-placed insurance can cost two to three times more than a policy you choose yourself, and it only protects the lender's interest, not your belongings or liability.

A cancellation without a replacement policy can also cause a coverage lapse. This puts you at risk and may violate your mortgage agreement.

To avoid issues, send your lender the new policy details before canceling the old one. Confirm they update your escrow account with the correct information.

If your homeowners insurance premium increases or decreases, your lender will adjust your escrow account to match the new amount. Because your escrow payment is included in your monthly mortgage bill, this change can cause your total mortgage payment to rise or fall.

When premiums go up, your lender may run an escrow analysis and increase the portion of your payment that goes toward insurance. If premiums drop, your mortgage payment may decrease, or you might receive an escrow refund. Either way, your lender is required to notify you of changes and provide an updated statement so you know how your payment is calculated. You'll receive an updated escrow analysis statement showing your new monthly payment breakdown, around 45 days before the change takes effect, but this varies from lender to lender.

Some lenders allow you to pay homeowners insurance yourself instead of through escrow. This option becomes available once you reach 20% home equity, though requirements vary by lender and loan type. Paying directly gives you greater control over when and how you pay your insurance premiums.

You can request to remove homeowners insurance from your escrow account once you reach 20% equity in your home, though your lender's approval isn't guaranteed. Lenders evaluate several factors before allowing you to pay insurance directly, including your payment history and loan type.
Most conventional mortgages allow escrow removal at 20% equity. FHA and VA loans have stricter requirements: FHA loans often require you to keep escrow for the loan's entire term, while VA loans may allow removal after one year of on-time payments. Check your loan documents or contact your lender to understand your specific loan's requirements.

Yes, you can switch providers even if your insurance is paid through escrow.

Since the average cost of home insurance is cheaper than the cost to repair your home outright after a covered event, you should continue coverage after paying off your home.

Understanding how home insurance works with mortgage payments can help you manage your financial commitments. Home insurance payments are usually included in your mortgage payment through an escrow account, which most lenders require.

Your lender sets up the escrow account to collect funds for property taxes and insurance, then pays these bills when they're due. Knowing how escrow manages your insurance payments helps you navigate your financial responsibilities.

Below are answers to frequently asked questions about homeowners insurance and mortgages.