Homeowners Insurance and Mortgage Payments

Many mortgage lenders make homeowners insure their properties. They also often combine their home insurance premiums with their mortgage payments. Here's everything you need to know about why they do this, how it works, and more.

person writing check with mortgage statement

Here's something people who've bought a house (should) know, but that often surprises people who've yet to do so: U.S. law doesn't require you to insure your home.

Which is strange, as the law does require Americans who own--or even just drive--a car to have at least some insurance. (Even if it's just liability coverage.)

No such law exists for homeowners.

Of course, just because the law doesn't force you to insure a house, that doesn't mean you're home free if you decide to pass on such coverage.

In fact, if you can't pay for a house in cash and you need a mortgage to buy it, your lender probably will make you purchase homeowners insurance.

And not only that, but in many cases the lender will make you combine your mortgage and home insurance payments, too. (Don't be shocked if it includes your property taxes in that mix as well.)

You do this through something called a mortgage escrow account. The gist of how this kind of escrow account works: the lender sets it up. You fund it via your monthly mortgage payments, which are increased just enough to cover that year's insurance premiums.

After that, the lender manages the account and uses it to pay your homeowners coverage--and often your property taxes--in full and on time each year.

The benefits to both parties should be pretty clear. Your lender can rest easy knowing the home they helped pay for is properly insured. (And continues to be properly insured, since they're paying the premiums.) As for the homeowner, you have one fewer bill you need to worry about paying each month.

That's not all there is to this story, though, so keep reading to learn more about why mortgage lenders require escrow accounts, how they work, how you can get out of them and handle your insurance payments on your own, and more.

How to Get Out of a Mortgage Escrow Account

A few paragraphs back, you read that most mortgage lenders require homebuyers to insure their new pieces of property. And many often use escrow accounts to combine those insurance premiums with their customers' mortgage payments.

Which should mean that paying for a home in cash allows you to avoid both of the situations described above, right?

Actually, that is what it means. Most experts will warn you against skipping--or skimping on--homeowners insurance even if you don't have to buy it, though. It protects both the structure of your house--or townhouse, condo, or co-op--as well as all of the possessions and belongings you cram inside of it. It protects you in a few other ways, too. (For more information, read our article, "Homeowners Insurance Policy and Coverage Basics.")

If you need a loan to purchase a home, however, expect the lender to require insurance. You may be able to get out of escrowing your premium payments, though--but only in certain circumstances.

For example, if you put 20 percent (or more) down on your house, condo, or co-op, the lender may let you opt out of roping your homeowners insurance payments into your mortgage escrow account.

Unfortunately, you'll likely pay for that privilege. Many lenders charge people who want to avoid the escrow requirement a "waiver fee." Or they increase the interest rate on the resulting loan. It's hard to say exactly how much such a thing might cost you, but it isn't unusual for it to add up to around 1 percent of your total mortgage amount.

Just know that if you go this route and then fail to keep up with your homeowners insurance payments, your lender can revoke its waiver.

Some Mortgage Types Require Escrow Accounts and Some Don't

The type of mortgage you take out for your new house--or condo or co-op--has a lot to do with whether or not your lender makes you to use an escrow account for homeowners insurance payments.

Conventional Loans

With conventional mortgages, for instance, most lenders do tie this sort of escrow account usage to loan approval. (In other words, you have to agree to bundle your mortgage and insurance payments to get a loan.) Some don't, though, so if you'd prefer to handle these bills on your own, look for one that doesn't require escrow accounts.

Federal Housing Administration (FHA) Loans

According to nolo.com, FHA-backed loans always require escrow accounts and payments.

Veterans Administration (VA) Loans

The Veterans Administration, on the other hand, does not force financial institutions that make VA-guaranteed mortgages to use escrow accounts. Many do anyway, though, due to a VA requirement related to hazard coverage and property taxes.

More On How Mortgage Escrow Accounts Work

Earlier, you learned that lenders set up and manage mortgage escrow accounts while homeowners fund them via their monthly payments.

That's just the general overview of how these accounts work, though. Here's some more information on the process:

  • Before your lender sets up your escrow account, it'll estimate your yearly homeowners insurance premium. (It'll also estimate your yearly property taxes--if it's going to rope them into your mortgage escrow payments as well.)
  • If the lender gets this estimate wrong, it may send you a refund at the end of the year. Or it may ask you to pay extra. This depends on if it under- or over-estimates your yearly premium.
  • Expect your mortgage escrow payment to change from year to year. And expect this even if your lender is spot-on with its estimate of your home insurance premium the first year you work with them. This is because premiums (and property taxes, too, if they're included here) usually change from one year to the next.
  • Take the time to carefully review the escrow account statement your lender sends you at the end of the year. If you don't, you won't catch any mistakes. You also won't find out if your lender is failing to pay your home insurance or property tax bills, or failing to pay them on time.
  • Don't hesitate to call, email, or otherwise contact your mortgage lender if you come across any problems or errors on your year-end escrow statement. At the end of the day, you alone are responsible for these payments. Yes, the lender is supposed to make them on your behalf, but you are the one who will pay--or worse--if they make a mistake.

How Refinancing Impacts Your Mortgage Escrow Account and Payments

Many Americans refinance their mortgages to save money or reduce the length or term of their loans.

According to sfgate.com, here's what happens to your existing mortgage escrow account when you take this step:

  • If you stick with your current lender and just refinance the terms of your existing mortgage, nothing should happen. Your lender shouldn't have to set up a new escrow account for the refinanced loan. Instead, it'll likely continue to use the one it established when you first took out your mortgage.
  • If you change lenders in order to refinance your mortgage, though, you might get a refund from the one you're leaving. Why? The new lender pays off your existing mortgage before setting up a new loan. If the escrow account associated with your existing mortgage contains unused funds, your current lender will refund it to you. Also, your new lender probably will establish a new mortgage escrow account to go with your refinanced loan.

How Switching Home Insurance Companies Impacts Your Mortgage Escrow Account

A lot of Americans change home insurers, too. Most do this to reduce their premiums or to get "more bang for their buck" by paying the same (or a similar) amount for an increase in coverage. Others do it because they're unhappy with the service they receive from their current provider.

No matter what pushes you to do it, switching home insurance companies usually affects your mortgage escrow account in a few ways. Here's what you need to know about those impacts:

  • The first thing you should do after setting up your new homeowners policy and canceling your old one is contact your mortgage company. They need to know about these kinds of change as soon as possible. If you don't update them, they may send your next premium payment to the wrong insurer.
  • When you first go to let your lender know about this change, feel free to do so by phone or even email. Some companies are fine with that. Others make you put it in writing. Regardless, they'll want some from information from you so they can switch everything over on their end. This includes the name and address of your old or current insurer, the name and address of your new insurer, and your old and new homeowners insurance policy numbers. You'll also likely have to give them your mortgage loan number. 
  • After all of the above is out of the way, your lender should handle the rest. They'll once again estimate your yearly premiums and then use that to update your mortgage and escrow payments. They'll also use your escrow account to cover your home insurance premiums moving forward, of course.
  • By the way, you need to let your mortgage lender know if you switch insurers even if they've waived your escrow requirement and you now handle your own home insurance payments. If they hear your existing homeowners policy has been cancelled, they may attempt to get you a new one. Clearing that up could be both annoying and costly.

Other Advice and Things to Keep in Mind

  • If you ever decide to change lenders or home insurance companies, shop around before you make the switch. That's the only way to ensure you'll get what you want for the best possible price.
  • Some insurers require people to pay their yearly homeowners policy premium up front, in one lump sum. Others will let you continue to pay monthly, but then charge you a service fee or raise your premium as a result. Consider both of those scenarios before you ask your lender to waive its escrow requirement.
  • Don't expect your lender to just waive your escrow requirement and then leave things like that. It may still ask you to prove you're paying for homeowners insurance (and paying your property taxes, if your escrow account covered them, too). That's not the biggest deal in the world, of course, but it can be a hassle.

Frequently Asked Questions

Q: Do I have to insure my home?

A: If you're asking if there are any laws that require you to buy homeowners insurance (like the laws that require car insurance), the answer is no.

That said, if you take out a loan to buy a house, condo, or co-op, the lender likely will require you to have a certain amount of home insurance.

So unless you pay for your new home in cash, yes, you'll probably have to insure it.

Q: Is homeowners insurance included in my mortgage payment?

A: In most cases, yes, your mortgage payment should include your home insurance premiums. Basically, if your lender set up an escrow account along with your mortgage and requires you to fund it, your monthly payment likely covers your mortgage, your homeowners policy, and probably your property taxes, too.

If you aren't sure about any of this, ask your lender for clarification. 

Q: I was told I have to pay for the first year of homeowners coverage at closing. Does that mean my monthly mortgage and escrow payments will be lower for the next 12 months?

A: Unfortunately, no, that's not what it means. You pay ahead in this way so the lender can rest assured your home insurance--and your mortgage and likely your property taxes, too--will be covered on time and in full. You're also doing this so your lender can cover your first insurance bill, which has to be paid in advance.

Q: Do I have to escrow home insurance? Can I pay for it myself?

A: Some mortgage lenders don't require the kinds of escrow accounts described in this article. Get a loan from one of them and you can handle your own home insurance payments.

And what if you get a loan from a company that does require escrow accounts? Ask if it will waive that requirement. Or ask what it will take for them to do so. Some lenders will waive it if your down payment is big enough--usually 20 percent or more--or if you build up enough equity in the home.

Q: Can I change home insurance companies? And if I can, what would that mean for my escrow account?

A: Yes, you can change home insurance companies. And you can do so whenever you like and for whatever reason.

As for how switching home insurance companies affects your mortgage escrow account, it's pretty simple. Assuming the premium payments of your new homeowners policy are at least somewhat different from those of your old one, the lender will alter your escrow payments accordingly.

Just be sure to tell your lender about the change. The last thing you want is for your home insurance payment to go to the wrong company.

Q: What happens to the money in my escrow account after I pay off my mortgage?

A: If you pay off your mortgage and the escrow account tied to it still contains some money, your lender likely will send it to you.

That check probably won't arrive in your mailbox a week later, though, so be patient. It can take a while for your payoff funds to clear the banking system. Plus, your lender will want to make sure you've actually--and fully--paid off your mortgage before refunding any leftover escrow money, and that takes time, too.

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