If you’re a homeowner with a mortgage, one of the questions you likely have is how your homeowners insurance and mortgage are related.
Did you know that, in many cases, your home insurance is actually included in your monthly mortgage payment? Let’s dive into what that means for your homeowners insurance and mortgage.
Here’s what you’ll learn in this post:
● What’s included in your mortgage?
● What insurance is required for a mortgage?
● What are the benefits of escrowing your homeowners insurance?
● Are you locked into your homeowners insurance policy?
WHAT’S INCLUDED IN YOUR MORTGAGE?
When you take out a mortgage to buy a home, your lender will require you to make regular payments. These payments will include money for your principal (the amount you borrowed), interest (the cost of borrowing the money), taxes, and often insurance (referred to as PITI).
By making these payments on time and in full each month, you'll build equity in your home and eventually become the owner outright. But if you fall behind on your payments, you could risk losing your home to foreclosure.
For that reason, it's important to understand all of the components of your mortgage payment and to make sure you can afford it before signing the dotted line.
WHAT INSURANCE IS REQUIRED FOR A MORTGAGE?
When you finance a home purchase, your lender will require you to carry insurance on the property. The purpose of this insurance is to protect the lender's investment in the event that the home is damaged or destroyed.
Depending on the amount of your down payment and the type of mortgage you have, you may be required to pay one or more of the following types of insurance:
● Homeowners insurance,
● Mortgage insurance,
● or Additional insurance
Homeowners insurance covers the structure of the home and is typically required by lenders. Mortgage insurance protects the lender in case of default and is often required for loans with low down payments. Additional insurance may be necessary if the home is located in a high-risk area; this insurance protects against damage from floods, hurricanes, and other natural disasters.
While paying for insurance may seem like an additional expense, it’s important to remember that it is protecting your investment in your home.
WHAT IS AN ESCROW ACCOUNT?
If you still have more questions about what your escrow account is all about, we get it. Let’s dive into the escrow account.
An escrow account ensures that your insurance premiums are paid on time, preventing lapses in coverage that could leave you vulnerable to financial losses. In addition, an escrow account provides a measure of protection for your lender in the event that your property is damaged or destroyed.
By collecting and holding funds to pay your insurance premiums, an escrow account helps to ensure that your property is adequately protected. As a result, an escrow account can provide peace of mind for both you and your lender.
Additionally, a few scenarios can play out when it comes to escrow account overpayments and underpayments. According to Experian, "In the case of overcharges, the lender will issue the homeowner a refund check for any overages. In the case of undercharges, the lender may provide a few different options."
The homeowner may be asked to pay the difference out of pocket, or the lender may agree to spread the shortage over a period of time. In either case, staying in communication with your lender is essential to ensure that your escrow account is managed correctly.
WHAT ARE THE BENEFITS OF ESCROWING YOUR HOMEOWNERS INSURANCE?
In most cases, your lender will require you to escrow your homeowners insurance and property taxes as part of your mortgage payment. Again, this means that they will hold on to a portion of each payment you make and use it to pay your taxes and insurance when they come due.
Some borrowers prefer to avoid this, as it can tie up a significant amount of money each month. However, there are some advantages to including these costs in your mortgage.
Here are two big benefits of escrowing your homeowners insurance:
● Simplify your budget by consolidating your housing-related expenses into one monthly payment
● Avoid the temptation of spending the money you have set aside for taxes and insurance, as it will be out of sight and out of mind
Whether or not you include these costs in your mortgage is ultimately up to you, but it is something that you should consider carefully before making a decision.
ARE YOU LOCKED INTO YOUR HOMEOWNERS INSURANCE POLICY?
When you have an escrow account for your home insurance, your mortgage lender collects money for your insurance premiums along with your regular mortgage payments and holds the funds in the account.
When your policy comes up for renewal, the lender pays the premium from the escrow account. Because you're not paying the premium yourself, it's easy to forget about your policy and how much it costs. However, just because you have an escrow account doesn't mean you're locked into a particular home insurance policy.
You can shop around for a new homeowners insurance policy at any time — and you should, because rates can change and you may be able to find a better deal. If you find a better deal, simply notify your mortgage lender, and they'll start making new escrow payments on your behalf. If you want to switch home insurance policies mid-term, be sure the existing insurance carrier will provide a pro-rated refund. Then, simply sign the one page form and send the refund back to your escrow account when received.
In short, don't worry if you can't remember all the details of your home insurance policy or have seen an excessive hike in premiums— you can always shop around for a new one.
As always, it's essential to understand what is and isn't covered by your mortgage and homeowners insurance policy. By understanding the details of your policies, you can be better prepared in the event of a loss. Contact your mortgage company if you have any questions about coverage or want to make changes to your policy.
And if you need help finding the best homeowners insurance coverage for the best price, start by speaking to a SimplyIOA agent at 833.872.4467 or get a homeowners insurance quote online now.
