Is Home Insurance Included in Your Mortgage?

When you get a mortgage on a house, the lender will require you to get home insurance. Your lender may require you to pay your home insurance premiums through an escrow account, depending on a variety of factors. Escrow accounts not only ensure that insurance premiums are paid on time, but they also allow you to avoid making a large annual lump-sum payment.

If you do not have an escrow account and do not pay your home insurance or property taxes, the lender may take action. The lender may set up an escrow account or add the delinquent amounts to your mortgage balance. In some cases, a lender may purchase a homeowners policy that is more expensive than the one you purchased and then bill you.

What Is Homeowners Insurance?

Homeowners insurance, also known as home insurance, protects your home and its contents. You pay an annual premium for coverage, and the insurance company pays for covered losses up to the limits of your policy. For example, if a fire damages your home, your homeowners policy may cover the cost of repairing it as well as replacing damaged items such as rugs and furniture. Most standard home insurance policies include the following six coverages:

  • Dwelling
  • Other structures
  • Personal property
  • Loss of use
  • Personal liability
  • Medical payments to others

The purchase of homeowners insurance is not required by law. However, if you take out a mortgage, the lender will require you to purchase a policy and keep it in force until the loan is paid off. Many lenders demand that you pay your home insurance through an escrow account.

Homeowners Insurance and Escrow

Your lender or mortgage servicing company will use an escrow account to pay critical, recurring property-related expenses. A mortgage escrow account is typically used to collect and hold funds for the payment of your homeowners insurance and property taxes.

An escrow account allows you to spread out insurance and tax payments rather than paying them all at once each year. The lender gains more assurance that your insurance and tax payments will be made on time by requiring an escrow account.

  • When insurance payments fall behind, you risk losing coverage. If you fail to pay your property taxes on time, the government may levy a lien against your home.

The escrow account is managed by the mortgage servicer. Your only responsibilities are to make regular monthly payments and to review your escrow statements to ensure that payments are made in full and on time. Annual property taxes and homeowner premiums fluctuate. The mortgage servicing company will adjust the amount you must pay to the escrow account as changes occur.

Mortgage servicers are required by law to provide an annual statement of escrow account activity. The statement will include your escrow payments as well as the balance of your escrow account. It will also include any anticipated increases or decreases in escrow deposits, as well as the dates on which they will take effect.

How To Set Up an Escrow Account

The lender will open an escrow account for you if one is required. Even if an escrow account is not required, the lender will usually give you the option of opening one.

Escrow accounts are required by lenders for a variety of reasons. In 2013, the Consumer Financial Protection Bureau issued a rule under the federal Truth in Lending Act requiring lenders to collect escrow payments on higher-priced mortgage loans for at least five years (HPML). HPMLs are loans with an annual percentage rate (APR) that is a certain number of percentage points higher than the average prime offer rate (APOR), which is an average of mortgage interest rates, fees, and other terms for highly qualified borrowers. HMPLs include the following:

  • First-lien mortgages: In the event of a foreclosure, the lender is the first in line to receive payment. If the APR on a first-lien mortgage is at least 1.5 percentage points higher than the APOR, it is considered higher-priced.
  • Jumbo loans: Jumbo loans are more expensive if the APR is at least 2.5 percentage points higher than the APOR.
  • Subordinate-lien mortgages: Also known as “junior-lien” or “second-lien mortgages,” subordinate-lien mortgages are the second in line for payment after a foreclosure. When the APR on these loans is at least 3.5 percentage points higher than the APOR, they are considered higher priced.

If You Don’t Have an Escrow Account Requirement

If you put down at least 20%, you can usually choose whether to pay insurance premiums and property taxes through an escrow account. However, if you do not have an escrow account, you are responsible for paying your home insurance and property taxes on time and in full.

Mortgage servicers may waive the escrow-account requirement if the following conditions are met:

  • You request it, no laws prohibit it, and you're up to date on your mortgage payments.
  • Your mortgage balance is less than 80% of the original appraised value of your home.
  • You haven't been late on a payment for more than 30 days in the last six months.

Homeowners Insurance vs. Private Mortgage Insurance

You may also be required to pay private mortgage insurance by your lender (PMI). If you fail to make your mortgage payments, PMI protects the lender. Using an escrow account to collect insurance and tax payments protects the lender from tax liens and uninsured losses, whereas PMI protects the lender if you default on your mortgage.

  • When you make less than a 20% down payment on a conventional loan or refinance a property with less than 20% equity, lenders typically require PMI. If PMI coverage is required, the lender will arrange it through an insurance company. 

Frequently Asked Questions (FAQs)

How do I know if homeowners insurance is included in my mortgage payment?

When you apply for a mortgage, you will be given a stack of documents, one of which is titled "Regulation Z." If the lender requires you to pay home insurance and taxes through an escrow account for an HPML, the payment schedule will be included in the Regulation Z document.

When is escrow required for a mortgage?

If you make less than a 20% down payment on a home, your lender may require you to have an escrow account. If your loan is an HPML, an escrow account may be required. Loans that exceed conventional loan limits and have higher-than-average interest rates are examples of HPMLs.

How much homeowners insurance do I need?

You should have enough dwelling coverage to rebuild your home completely. Personal property coverage equal to 50% to 70% of your dwelling coverage is standard in most standard home insurance policies. If that is insufficient to cover some of your most valuable possessions, you may need to purchase scheduled property coverage. You should also get enough personal liability insurance to cover all of your assets.