Is Homeowners Insurance Included In A Mortgage?

If you’re a homeowner or thinking about buying a home, you might wonder, “Is homeowners insurance included in my mortgage?” It’s a fair question. After all, the total mortgage payment is a bundle of components, as you know from using a mortgage calculator. It makes sense to wonder if insurance sneaks into that package, too. Spoiler alert: the answer isn’t as straightforward as you might think.

Gain answers to how homeowners insurance and mortgage payments play together. By the end, you’ll know how they’re connected, when insurance is included, and what to do if it isn’t.

What Is Homeowners Insurance, and Why Do You Need It?

Think of homeowner’s insurance as a financial safety net for your home. If your house were a trapeze artist, homeowners insurance would be the catching net when things go wrong.

A homeowners insurance policy typically covers:

• Property Damage: Fires, storms, or rogue tree branches that decide to land on your roof. Some acts of burglary and vandalism may be covered.
• Liability: If someone trips on your driveway and breaks an ankle or if you accidentally launch a baseball into a neighbor’s window.
• Additional Living Expenses: If your house is temporarily unlivable due to damage and you must stay elsewhere.

It’s not just a nice-to-have; it’s a cushion for if something happens to what’s likely your biggest investment. Just note that what’s typically included and what’s extra in the policies does depend on the housing market you’re buying in. For instance, coastal areas may not have all wind damage covered. Earthquake insurance will be extra when living out west in California, Oregon, and Washington state. Flood insurance is always an additional policy. Many homeowners living near or on the waterfront will need it for a mortgage.

Breaking Down Mortgage Payments

Your monthly mortgage payment goes beyond repaying your lender for the money you borrowed to buy the home. The several components are commonly referred to as PITI:

1. Principal – The original loan amount (without interest) that you’re gradually paying back.
2. Interest – The fee your lender charges for borrowing money.
3. Taxes – Property taxes, which your lender might collect and pay on your behalf.
4. Insurance – This includes homeowners insurance and, in some cases, mortgage insurance.

The size of your down payment, total purchase price, and location influences these components. After selecting a lender and locking in the loan, only homeowner’s insurance is shoppable.

How does insurance end up as part of your mortgage payment?

Enter the Escrow Account

Most lenders set up escrow accounts to manage insurance and tax payments. By doing so, they ensure that these essential housing expenses are paid on time. Combining these expenses into one monthly payment also simplifies expense management for homeowners.

An escrow account is like a savings account your lender manages on your behalf. You notify them of your insurance policy holder and the amount owed. They’ll also receive the property tax bill from the local government. The mortgage servicer estimates what you’ll owe when the bill comes due and divides it across all the payments (usually 12). 

It collects money from you as part of the monthly payment, along with your principal and interest, to cover homeowners insurance and property taxes. When your insurance premium or property tax bill comes due, the lender pays it directly from the funds gathered each month.

For example, if your annual homeowners insurance premium is $1,200, your lender will divide that amount into 12 installments of $100. That $100 gets added to your mortgage payment and deposited into your escrow account. 

Think of it as a subscription box service for your house. You’re making smaller monthly payments instead of being hit with one big annual bill.

Property tax payments increase over time, reflecting changes to local government budgets, tax rates, and home values. It’s not something homeowners have as much control over. Homeowners do have a choice in their coverage. Factors such as home value and location influence home insurance premiums. 

Is Homeowners Insurance Automatically Included in Your Mortgage?

The short answer is sometimes, yes. Lenders often require homeowners insurance as a condition for approving your mortgage. That’s because the lender wants to protect its investment in case something happens to the property.

When homeowners insurance is a requirement to protect the lender’s investment, they typically add stipulations like:

• The policy must cover the full replacement value of the home.
• Protection for specific incidents, like fire, vandalism, falling objects, wind, and flooding
• Coverage for the unpaid mortgage principal

When Homeowners Insurance Isn’t Included

Some mortgage plans don’t include an escrow account collecting homeowners insurance, or they make it optional if certain criteria are met. In that case, it becomes your responsibility to pay it separately. Don’t panic! It just means you’ll foot the bill on your own when the premium is due.

How to Check If Your Homeowners Insurance Is Included

Not sure if your mortgage payment already covers homeowners insurance? Here’s how to find out:

1. Review Your Mortgage Statement

Look for a breakdown of your monthly payment. Your homeowners insurance is likely included if you see “escrow” listed.

2. Check With Your Lender

A quick call or email to your lender should clarify things. If any numbers seem unclear, feel free to ask for clarification.

3. Annual Payment Notice

As property taxes and insurance costs change annually, your mortgage servicer is required to send notice of any monthly payment changes. So if your mortgage payment is increasing or decreasing, and you’re on a fixed-rate loan, that’s likely why. Look for this statement in your mail.

Transparency is your friend here, so never hesitate to dig into the details.

How Homeowners Insurance Affects Your Monthly Payment

Including homeowners insurance in your monthly mortgage payment simplifies your budgeting. Instead of worrying about a large annual or biannual expense, you spread the cost over 12 months. This can make it easier to manage your finances with fewer bills to track and pay on time. Plus, it helps you avoid late fees and penalties from missed payments.

The cost of homeowners insurance changes over time. The value of your home, its location, and any recent updates to risk maps influence your rate. So can any major disasters–may find they owe more in the years following a severe hurricane, wildfire season, or tornado outbreak.

Reviewing your homeowner’s policy regularly is a good idea to check you have adequate coverage. Look at the replacement value, your deductibles, and additional insurance riders. If you need to adjust, send the new information to the mortgage lender to update your escrow account.

Pros and Cons of Including Homeowners Insurance in Your Mortgage Payment

Having homeowners insurance folded into your mortgage payment comes with its perks, but it’s not without a few downsides. Here’s a closer look:

Pros:

• Convenience: No need to juggle multiple bills or due dates. Everything’s rolled into one neat payment, and the lender will collect it for you.
• Easier Budgeting: By spreading the insurance cost over 12 installments, you avoid the shock of one large annual lump sum payment.
• Automatic Payments: Your lender handles paying the premium, so you don’t have to worry about missing a deadline.

Cons:

• Less Control Over Timing: You won’t get to decide when your premiums are paid, as your lender manages the payment schedule.
• Escrow Adjustments: For any increases to your premium or property taxes, your lender may need to adjust your escrow account, leading to a higher mortgage payment.
• Potential Overages or Shortages: Your escrow account may collect more or less than what’s actually needed, causing discrepancies. Some accounts set minimum amounts as a financial protection; if, after paying property taxes, it goes underneath this amount, what you owe could change.

What Happens If Your Mortgage Company Fails to Pay Your Home Insurance?

Imagine this: you’re diligently making your mortgage payments, trusting that your mortgage company handles your home insurance premiums through your escrow account. But what if they drop the ball?

First, you could lose your insurance coverage, leaving you vulnerable to financial losses if something happens to your property. No one wants to be caught off guard by a disaster without the safety net of insurance. 

Acting quickly is crucial. Contact your mortgage lender or loan servicer immediately to resolve the issue. You might need to provide proof of payment or other documentation to get things back on track. Sometimes, you may need to contact your insurance provider directly to verify that your policy remains active. 

Stay on top of your mortgage payments and insurance premiums to avoid any potential issues. Regularly reviewing your mortgage statements and communicating with your lender helps catch any discrepancies early.

The Risk of Lapsed Insurance

A quick cautionary tale here. If your homeowners insurance lapses for any reason, your lender can impose force-placed insurance, for which they choose an insurer on your behalf. Here’s the kicker: it’s often more expensive and has less coverage than a policy you pick yourself. Trust me, you don’t want to go down this road!

What Happens If Homeowners Insurance Isn’t Included?

If your insurance isn’t included in your mortgage payment, you’ll pay the premiums directly to your insurance company. Many insurance providers allow you to split the payment into monthly installments instead of once a year, making the cost more manageable. Remember to:

• Track your premium due dates so you don’t miss a payment. Set up an automatic withdrawal if it’s an option.
• Regularly shop around for better rates or coverage options.
• Communicate with your lender or insurance company if you notice unexpected changes.

Including Homeowners Insurance In the Monthly Mortgage Payment

Many homeowners will find their insurance and property taxes rolled into their mortgage payment, thanks to the convenience of an escrow account. But if it’s not, don’t worry! Managing separate payments is entirely doable.

If you’re unsure whether your policy is included, review your mortgage statement or contact your lender. And most importantly, remember to keep that coverage up to date because when life happens (and it will), you’ll want to be ready.