Owning a home is complicated. From the actual maintenance and day-to-day management of your home to the intricacies of a mortgage, there’s a lot to think about whether you’re thinking about buying a home or already own one.
One of those more complicated items is homeowners insurance. You need it, but not everyone handles it the same way. Depending on your mortgage lender and insurance provider, you may include homeowners insurance in your mortgage, or you might pay it ahead of time.
Homeowners insurance, also known as home insurance, gives you protection if things go wrong around the house that are outside your control, like a sewage backup, damage from a storm, or mold developing. It’s a separate policy from your mortgage that is serviced by an insurance company rather than by a lending bank.
When you get a mortgage, the home is technically owned by the bank while you pay off the loan. As such, lenders want to protect the property, which is why you need a homeowners insurance policy. (You should want to protect the property, too, of course.)
With a homeowners insurance policy, you’ll be able to repair damages to the home with less money out of pocket and protect the bank’s investment. Of course, once you pay off the mortgage and own the home outright, you’ll still want the policy to protect your home and make sure you’re covered in the event of disasters or accidents.
There are typically two types of insurance related to any mortgage. Your homeowners insurance protects you from covered damage to your home that’s outside of your control. It's insurance that protects the asset itself. Your mortgage insurance, however, protects the loan.
Typically known as private mortgage insurance or PMI, mortgage insurance is required by most lenders when you make a down payment of less than 20% on a loan. This insurance protects the lenders in the event that you default on your loan. It’s not for you as the homebuyer — it’s for the lender should you fail to repay the loan. This charge ranges from 0.46% to 1.5% of the principal loan amount and is assessed every month.
The PMI requirement varies from lender to lender, but generally speaking, once you reach 20% equity the charge drops off. In some circumstances, you may qualify for a PMI waiver as well, just make sure to go over the options with your bank. Examine the loan estimate from your lender to understand exactly what you need to pay and for how long.
A lapse in homeowners insurance could put a lender’s investment in danger, which is why homeowners insurance is usually a requirement for any mortgage. However, not all lenders handle it the same way.
Many lenders will require you to pay homeowners insurance in full for the year ahead, giving you coverage for the entire year without having to put money into escrow each month. Some lenders will require you to pay homeowners insurance as part of your monthly mortgage payment. When this happens, the money goes into an escrow account, which your bank pays on your behalf.
However, you don’t always have to pay your homeowners insurance in escrow. If you make at least a 20% down payment on a conventional loan or have a history of making on-time payments, you may qualify for an escrow waiver.
You may still prefer using escrow to make your homeowners insurance payments as it’s one less bill to keep track of. Or, as we touched on before, if you pay the year in advance, you’ll have it squared away at the start of each annual mortgage period and avoid the possibility of missing a payment.
Related: When is my first payment due?
Generally, when you get a homeowners insurance policy, you’ll have a monthly payment amount locked in for at least a year. If you’re paying your homeowners insurance in escrow every month, you shouldn’t expect to see any sudden changes. However, if your insurance cost goes up after the year and you’re paying in escrow, then your mortgage payment will go up as well.
That’s another reason why it may make more sense for you to pay your homeowners insurance policy in full each year, so you have more transparency into what you’ll pay each month for your mortgage.
Once you’ve paid your mortgage off, you won’t have to pay the bank, but you’ll still have property taxes and homeowners insurance to pay. These numbers may change each year.
Here are more details about homeowners insurance and mortgages.
Homeowners insurance is typically paid through regular premium payments, which can be made either on a monthly, quarterly, or annual basis, depending on the terms of your policy and your preference. You can choose to pay these premiums directly to your insurance provider through various methods, like as electronic transfers, checks, or credit card payments — or you may pay an annual premium ahead of time when you buy a house.
Your monthly mortgage payment typically includes payments for the loan principal, interest, property taxes, and insurance. The insurance may include both PMI and homeowners insurance. Your principal and interest payments go directly to the lender, property taxes and insurance payments go into escrow for payment to the proper recipients by your lender.
If you refinance your mortgage loan, your homeowners insurance will remain unchanged. As they’re different products offered by different institutions, your mortgage rate doesn’t have an impact on your homeowners insurance. If your property suddenly rapidly increases or decreases in value, however, you may want to adjust your homeowners insurance to verify that you have the proper coverage amount.
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