If you purchased your home through a bank or a mortgage lender, an escrow account is usually set up for disbursement of your home insurance premium and property taxes. Lenders often require you to have home insurance as part of the mortgage agreement to protect their own investment.
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Is home insurance included in my mortgage?
When buying a home through a bank, mortgage lender or other financial institution, it is common practice for it to set up an account with an escrow company to make sure home insurance premiums and taxes are paid.
State laws do not require you to carry homeowners insurance, but lenders will require it to protect their own investment. If you should default on your loan, the lender would be able to repossess the house in order to recoup its investment. If home insurance was not included, your lender would be out of their money if the house was destroyed and you defaulted on your loan.
Do I have to pay homeowners insurance through escrow?
As part of your mortgage agreement, lenders often require you to have an escrow account set up to cover your home insurance. You'll probably need to buy enough dwelling coverage, more often termed "hazard insurance" by lenders, to match the cost to rebuild the home if it is destroyed.
Your mortgage agreement will probably include what's called a "mortgagee clause."
This allows your mortgage company to withhold a claim settlement in order to make sure the funds received go toward repair of the home.
Some mortgage companies allow you to waive the escrow requirement if you make a down payment of 20% or more. If you're able to pay that, many lenders are willing to assume that you can handle your own home insurance and property taxes.
If you can afford the 20% down payment and decide to forego the escrow account, you'll still probably have to pay a waiver fee. This fee is usually one-quarter to three-eighths of a percentage point. If you fail to keep up on home insurance payments, the lender can revoke the waiver.
Homeowners insurance vs. mortgage insurance
In the course of buying your home, you'll probably hear about mortgage insurance. Mortgage insurance and homeowners insurance aren't the same thing. The key difference between homeowners and mortgage insurance is in what each of them covers.
Homeowners insurance protects both your and your lender's investment if your home is damaged or destroyed. While your mortgage lender will only be interested in the hazard coverage that homeowners insurance provides to protect the structure of your home, it also covers your personal property and protects you if someone is hurt on your property or if you cause property damage to others.
Mortgage insurance covers your lender if you default on your mortgage payments. It does nothing to cover you or your house.
How changing your home insurance affects your mortgage
Home insurers change their rates frequently to stay competitive. You should compare home insurance quotes from different providers when your home insurance policy is coming up for renewal to make sure you're still getting the best coverage at your best price.
While changing home insurance providers is definitely encouraged, there are some points you should take into consideration to be aware of how it can affect your mortgage:
- Do not cancel your current home insurance policy until the coverage date of the new policy starts. If you do drop your old policy too soon, you could not only be without coverage if your house is damaged in the interim, but it could also break the terms of your mortgage agreement. It can increase the chances of being denied for home insurance in the future, too.
- When you do find a home insurance policy you like, contact your mortgage company to provide them with the information of the new insurance provider. They will make the required changes, and ensure that the escrow company is sending the monthly payment to the right provider.
- Even if you waived your lender's escrow requirement and are paying home insurance yourself, you should notify your mortgage lender. If it is unaware that you made the switch to a new provider and see you canceled your old home insurance policy, it may try to find you a new policy. This is costly and time-consuming to clear up.
- Once you've taken care of these points, your mortgage lender will handle the rest. After they have the new home insurance premiums, they'll update your mortgage and escrow payments. You should also see a refund check if your new home insurance policy has a lower premium.
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