Home insurance is not included in your mortgage payment, but your lender may require you to pay it through an escrow account
Your mortgage payment covers principal and interest on the loan itself. Home insurance is a separate product you buy from an insurance company. However, if your down payment was less than 20 percent, your lender will almost certainly require you to maintain homeowners insurance and may collect the premium from you each month as part of what feels like a single payment.
This happens through an escrow account—a holding account managed by your lender where you deposit money monthly for insurance and property taxes. The lender then pays these bills on your behalf when they come due. You are still the one paying for insurance; the lender is just collecting it from you and handling the payment to may support the policy stays active.
If you put down 20 percent or more, your lender cannot require you to maintain an escrow account, though many borrowers choose to keep one anyway for convenience. Even then, you are responsible for paying the insurance premium yourself—either monthly to the escrow account or directly to your insurance company.
Key Takeaways
- Home insurance is a separate bill from your mortgage; the premium does not go to your lender but to an insurance company.
- Lenders require escrow accounts (which collect insurance and taxes from you monthly) for borrowers with down payments under 20 percent.
- Your monthly mortgage statement may show insurance and taxes bundled with principal and interest, but these are three separate costs.
- If you have an escrow account, the lender pays your insurance company directly; if you do not, you pay the insurance company yourself.
- Homeowners insurance protects the lender's investment in the property, which is why they require it—not because it is part of the loan.
How escrow accounts work and what they hold
When you have an escrow account, your lender estimates your annual insurance premium and property taxes, divides that by 12, and adds that amount to your monthly mortgage payment. You send one check (or make one online payment) that covers principal, interest, insurance, and taxes—often called a PITI payment (Principal, Interest, Taxes, Insurance).
The lender deposits your insurance and tax portions into the escrow account and pays the bills when they arrive. Once a year, usually in the spring, your lender sends you an escrow analysis statement that shows what was collected, what was paid out, and whether you owe money or will receive a refund. If your insurance premium or property tax increased, your monthly payment may go up at that time.
You do not choose which insurance company the lender uses—you do. The lender straightforward requires that a policy exist and that it meets their minimum coverage standards. You shop for homeowners insurance on your own, and once you have a policy, you provide the lender with proof of coverage (usually a declarations page from the insurance company).
What happens if you do not have homeowners insurance
If your policy lapses and your lender finds out, they will likely purchase force-placed insurance (also called lender-placed insurance) on your behalf and charge you for it. This insurance is much more expensive than standard homeowners insurance—sometimes two to three times the cost—and it covers only the lender's interest in the property, not your belongings or liability.
Force-placed insurance is a protection mechanism for the lender, not for you. It exists because an uninsured house is a financial risk to the bank. Once your policy is reinstated, the force-placed insurance drops off and you stop paying for it, but you will have paid a penalty in the form of higher premiums during the gap.
To avoid this, keep your insurance active at all times. If you are switching policies, overlap them by a day or two so there is no lapse. Your lender may also send you a notice if they do not receive proof of renewal before your current policy expires, giving you a window to act.
The difference between escrow and paying insurance directly
If you have an escrow account, you never write a check to the insurance company. The lender handles that. You straightforward pay the lender each month, and they distribute the funds. This removes the burden of remembering to pay the insurance bill separately, but it also means you have less direct control over the timing and the company's receipt of payment.
If you do not have an escrow account (which is only possible if you put down 20 percent or more), you pay the insurance company directly. You receive the bill from them, you pay it on their schedule, and you are responsible for ensuring it does not lapse. Some borrowers prefer this because they see exactly what they are paying and when. Others find it more complicated because it is one more bill to track.
Either way, the insurance company is the one receiving the money and providing the coverage. The lender is straightforward a middleman in the escrow scenario, collecting your payment and forwarding it on your behalf.
When your escrow payment changes
Your escrow payment is not fixed. If your property taxes increase, your insurance premium rises, or your homeowners insurance company adjusts your rate, your monthly payment will change. Your lender recalculates the escrow account annually and notifies you of any adjustment.
Property tax increases are often the biggest driver of payment changes, especially in areas with rising home values. Insurance premiums can also shift if you file a claim, if your area experiences more frequent storms, or if your insurance company straightforward raises rates across the board. You cannot control these increases, but you can shop for a new insurance company if your current premium becomes uncompetitive.
If your lender's estimate was too high and you overpaid into escrow, you will receive a refund. If the estimate was too low, you may owe a small amount or your payment will increase to cover the shortfall. These adjustments are normal and happen to most borrowers at some point.
Removing an escrow account once you have built equity
Once you have paid down your mortgage to 80 percent of the original home value (or lower), you can request that your lender remove the escrow requirement. This is called canceling escrow or removing the escrow account. Your lender is not required to agree, but many will if you have a good payment history and meet their specific criteria.
To request removal, contact your lender's loan servicing department and ask about their escrow cancellation policy. They will tell you what documentation they need (usually a recent appraisal or property tax assessment showing your equity position) and whether there are any fees. Some lenders charge a small fee to close the account; others do not.
Once escrow is removed, you become responsible for paying insurance and property taxes on your own. Your monthly mortgage payment drops because it no longer includes those amounts, but you must now budget for and pay those bills separately. Many borrowers find this more work than it is worth and choose to keep escrow even after they are no longer required to have it.
How to read your mortgage statement and identify insurance costs
Your mortgage statement breaks down your payment into components. You will see a line for principal, a line for interest, and if you have an escrow account, separate lines for property taxes and homeowners insurance. The total of all four is your monthly payment.
The principal and interest portions stay roughly the same each month (though they shift slightly over time as you pay down the loan). The escrow portions—taxes and insurance—can change annually when your lender recalculates. If your statement shows a sudden jump in your total payment, check the escrow section first; that is usually where the increase comes from.
If you are unsure what each line means, your lender's website usually has a sample statement with explanations, or you can call their customer service line and ask them to walk you through it. Understanding your statement helps you spot errors and know what to expect when your payment changes.
Frequently Asked Questions
Can I choose my own homeowners insurance company if my lender requires escrow?
Yes. Your lender requires that you have insurance, but you choose the company and the policy. Shop around, get quotes, and pick the coverage that works for you. Once you have a policy, provide your lender with proof of coverage, and they will add the premium to your escrow account.
What if my insurance company cancels my policy?
Contact your lender when ready and let them know. You have a short window (usually 10 to 30 days depending on your state) to find a new policy before the lender purchases force-placed insurance. Once you have a new policy in place, send proof to your lender and the force-placed insurance will be removed.
Does paying through escrow mean the lender owns my insurance policy?
No. You own the policy; the insurance company issues it to you. The lender straightforward collects the premium from you and pays the bill. The lender is named as a loss payee (meaning they receive notice if the policy is canceled), but they do not own or control the policy itself.
If I pay off my mortgage early, do I get an escrow refund?
Yes. When you pay off the loan, your lender closes the escrow account and refunds any balance remaining in it. This usually happens within 30 to 45 days of payoff. You will receive a check or a credit to your account, depending on your lender's process.
Why does my escrow payment keep going up if I have not filed any insurance claims?
The most common reason is a property tax increase. Taxes are reassessed periodically and often rise with home values or local budget needs. Your insurance premium may also increase if your insurance company raises rates in your area, even if you personally have not filed a claim. Both are outside your control but are legitimate reasons for your payment to increase.