Homeowners insurance is not automatically included in your mortgage payment, but your lender can require you to pay it as part of an escrow account

When you get a mortgage, the lender has a financial stake in the house. If the house burns down or gets damaged, that stake disappears. So most lenders require you to carry homeowners insurance and prove you have it before closing. How you pay for it depends on your loan type and down payment.

If you put down less than 20 percent, your lender will almost certainly require you to set up an escrow account. Each month, you send the lender a payment that includes your principal, interest, property taxes, homeowners insurance, and sometimes mortgage insurance (PMI). The lender holds the insurance and tax money in escrow and pays those bills on your behalf when they come due. From your perspective, it all rolls into one monthly payment—but insurance is not included in the mortgage itself. It is a separate bill that your lender collects and manages.

If you put down 20 percent or more, you may have the option to pay homeowners insurance directly to your insurance company instead of through escrow. Even then, your lender will require proof that you have active coverage. You are responsible for paying the premium on time; if your policy lapses, the lender can buy a force-placed policy and charge you for it, which is usually much more expensive than a standard policy.

Key Takeaways

  • Homeowners insurance is a separate cost from your mortgage, but lenders typically require you to pay it through an escrow account if your down payment is less than 20 percent.
  • Your monthly escrow payment covers principal, interest, property taxes, homeowners insurance, and sometimes PMI—all bundled into one bill your lender collects.
  • If you put down 20 percent or more, you may pay insurance directly to your insurance company, but you must still provide proof of coverage to your lender.
  • If your insurance lapses, your lender can buy force-placed coverage at a much higher cost and add it to your loan balance.

How escrow accounts work with homeowners insurance

An escrow account is a holding account managed by your lender. Each month, you pay an amount that covers one-twelfth of your annual property taxes, homeowners insurance premium, and sometimes PMI. The lender deposits these funds into escrow and pays the bills when they arrive.

Your lender estimates what these costs will be for the year and divides by 12. If taxes or insurance go up, your monthly payment increases at the next escrow analysis, which happens once a year. If costs go down, your payment may decrease, or you may receive a refund. You do not choose which insurance company to use if you are in escrow; your lender typically requires you to name them as the loss payee, which means they receive notice if the policy is cancelled and can file claims on the property.

Escrow protects the lender's investment. It also protects you from accidentally letting insurance lapse or forgetting to pay property taxes. The downside is that you lose some control over timing and choice of insurance company, and you are funding the account month by month even though bills may only come due once or twice a year.

What happens if you put down 20 percent or more

With a 20 percent down payment, most conventional lenders will let you drop the escrow requirement. You then pay your mortgage payment directly to the lender and pay homeowners insurance and property taxes separately to the insurance company and tax assessor.

This gives you more control: you can shop for insurance, choose your deductible, and time your payments however you want. However, you are now responsible for remembering to pay both bills on time. If your insurance lapses even for a few days, your lender can purchase force-placed insurance, which is a policy the lender buys to protect their interest in the property. Force-placed policies are expensive—often two to three times the cost of a standard homeowners policy—and cover only the lender's interest, not your personal belongings or liability.

Even without escrow, your lender will ask for proof of insurance at closing and may request updated proof every year. Read your loan documents to see whether your lender requires you to maintain escrow or allows you to waive it.

The cost of homeowners insurance and what affects the premium

Homeowners insurance premiums vary widely based on the home's location, age, construction type, claims history, and the coverage limits you choose. A home in a flood zone or an area with high theft will cost more to insure than a home in a low-risk area. Older homes with outdated electrical or plumbing systems often cost more. Homes built with fire-resistant materials cost less.

Your deductible also affects the premium. A higher deductible (the amount you pay out of pocket when you file a claim) lowers your monthly cost. A lower deductible raises it. Most homeowners choose a deductible between $500 and $2,500.

Insurance companies also consider your credit score and claims history. If you have filed multiple claims in the past five years, insurers may charge more or decline to renew your policy. Shop around before buying; rates vary significantly between companies for the same home and coverage.

What force-placed insurance is and why it costs so much

If your homeowners insurance lapses—because you forgot to pay, your policy was cancelled for non-payment, or you let it expire—your lender can buy a force-placed policy to protect the property. This is a policy the lender purchases on your behalf and charges to your mortgage account.

Force-placed insurance is expensive because it covers only the lender's interest in the property (the loan balance), not your personal property or liability. It is also a bare-bones policy with minimal coverage. A standard homeowners policy might cost $1,000 to $1,500 per year; a force-placed policy can cost $3,000 to $5,000 or more. The cost is added to your loan balance, so you end up paying interest on it as well.

The best way to avoid force-placed insurance is to keep your policy active and provide proof to your lender if asked. If your lender buys a force-placed policy, contact your insurance company immediately to reinstate or obtain new coverage, then send proof to your lender so they can cancel the force-placed policy.

How to verify your insurance is active and your lender knows about it

At closing, you will provide your lender with a binder or declarations page from your homeowners insurance company. This document shows your policy number, coverage limits, deductible, and the effective date. The lender will verify that they are named as the loss payee (or mortgagee, depending on your state's language).

After closing, keep a copy of your insurance documents and your lender's contact information. When your policy renews each year, send an updated declarations page to your lender if they request it. Some lenders ask for proof annually; others only when you refinance or sell.

If you switch insurance companies, notify your lender before the old policy expires. Do not let there be a gap in coverage. If you are in escrow, your lender pays the premium directly, so you do not need to send proof each year—but you should still review your escrow statement to make sure the insurance payment is being made on time.

Frequently Asked Questions

Can I choose my own homeowners insurance company if I am in escrow?

You can shop for insurance and choose the company, but your lender must approve it and be named as the loss payee. Most lenders accept any policy that meets their minimum coverage requirements. Once you choose a company, provide the lender with the binder or declarations page before closing.

What if my escrow payment is too high or too low?

Your lender performs an escrow analysis once a year, usually around the anniversary of your loan. If taxes or insurance increased, your payment goes up. If they decreased, your payment goes down or you receive a refund. You can request an analysis if you believe the estimate is significantly off, but the lender is not required to adjust it outside the annual review.

Do I need homeowners insurance if I own my home outright with no mortgage?

No lender can require it, but homeowners insurance is still a good idea. It covers damage to the house, personal property inside, and liability if someone is injured on your property. Without it, you pay for repairs and lawsuits out of pocket. Mortgage lenders require it because they have money at stake; you should require it of yourself for the same reason.

What if I move and get a new mortgage—do I need new homeowners insurance?

Your existing policy typically transfers to a new owner when you sell, but you will not need it after closing. Your new lender will require you to obtain a new policy in your name before closing on the new home. Shop for insurance before making an offer so you know the cost and can include it in your budget.

Can my lender cancel my homeowners insurance if I miss a mortgage payment?

No. Your mortgage payment and insurance are separate obligations. Missing a mortgage payment does not cancel your insurance, and your insurance company will not know about it unless you stop paying the insurance premium itself. However, if you miss enough mortgage payments, your lender can foreclose, and the new owner will need their own insurance.