Is Homeowners Insurance Included in a Mortgage?

Home insurance is included in your mortgage payments through an escrow account, which most lenders require. We reviewed how lenders structure escrow accounts to break down what's actually included in your mortgage payment and where you have options. Your mortgage servicer manages this escrow account and uses it to pay annual or biannual expenses like property taxes and insurance on your behalf.

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:

Here's the practical difference we noticed: PMI goes away once you reach 20% equity, but homeowners insurance stays for as long as you own the home. That means your escrow payment drops when PMI is removed, but the insurance portion continues. Homeowners who don't realize this sometimes assume their full mortgage payment will decrease more than it actually does once they hit 20% equity.

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, the lender may add force-placed insurance to your escrow. Force-placed insurance is one of the most expensive and least protective outcomes for a homeowner. It can cost two to three times as much as a policy you choose yourself, and it only protects the lender's interest, not your belongings or your liability. Many borrowers don't realize a lender can add this coverage without their consent, and the cost gets passed directly into the escrow payment.

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.

If your escrow analysis shows a premium increase, you don't have to accept the higher rate. You can shop for cheap home insurance before your renewal date and switch providers while staying in escrow. In our experience reviewing how this process works, homeowners who compare quotes before their renewal date, rather than after the escrow adjustment hits, have more time to find a competitive rate and avoid a payment surprise.

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 check several factors before letting you 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 usually 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 call your lender to understand your loan requirements.

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

Even without a lender requiring it, homeowners insurance is worth keeping after you pay off your mortgage. Based on MoneyGeek's study, the average cost of homeowners insurance is $3,548 per year, far less than what most homeowners would pay out of pocket for a roof replacement, fire damage or liability claim. Dropping coverage to save on premiums puts your largest asset at risk for a relatively small annual cost.

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. Understanding how escrow manages your insurance payments helps you handle your financial responsibilities.

We answer common questions about homeowners insurance and mortgages.