Homeowners insurance is not automatically included in your mortgage payment, but your lender can require you to pay it as part of your monthly bill
When you get a mortgage, the lender has a legal claim on your house until you pay off the loan. That means the lender wants to know the house is insured against fire, theft, and other damage — because if the house burns down and you have no insurance, the lender loses their collateral. Most lenders solve this by requiring you to carry homeowners insurance and proof that you have it before they hand over the money.
The insurance itself comes from a separate insurance company, not your lender. But many lenders allow you to pay the insurance premium as part of your monthly mortgage payment. Your lender collects the money, holds it in an account called an escrow account, and pays the insurance company on your behalf when the bill comes due. This is optional in some states and required in others — it depends on your loan type, your down payment size, and your lender's rules.
If your lender does not require escrow, you can still choose it for convenience. Or you can pay your insurance premium directly to the insurance company yourself, separate from your mortgage payment.
Key Takeaways
- Your lender can require you to have homeowners insurance, but the insurance comes from a separate company, not your lender.
- If your lender allows or requires an escrow account, your insurance premium becomes part of your monthly mortgage payment.
- Your lender holds the escrow money and pays the insurance company directly, so you do not have to remember to pay the bill yourself.
- If escrow is not required, you can pay your insurance premium directly to the insurance company each month or year.
- Your mortgage statement will show your base payment, property taxes, insurance, and other escrow items as separate line items.
How escrow accounts work with homeowners insurance
An escrow account is a holding account your lender controls. Each month, you pay your lender an amount that covers not just your loan principal and interest, but also an estimate of your annual homeowners insurance premium, divided by 12. Your lender deposits this money into the escrow account and keeps it there until the insurance bill is due.
When your insurance company sends an invoice to your lender, your lender pays it from the escrow account. You never see the bill or write a check — the lender handles the transaction. This protects the lender because they know the insurance stays active and the house stays covered.
Your mortgage statement breaks down your payment into pieces: principal and interest (the actual loan repayment), property taxes (if escrowed), homeowners insurance (if escrowed), and sometimes mortgage insurance or homeowners association fees. The total of all these is your monthly payment.
When your lender requires escrow versus when it is optional
Lenders are most likely to require escrow if you put down less than 20 percent of the home's purchase price. The reasoning is that borrowers with smaller down payments are considered higher risk, so the lender wants tighter control over whether the house stays insured.
If you put down 20 percent or more, many lenders make escrow optional — you can choose to pay your insurance directly to the company instead. Some lenders offer a small discount on your interest rate if you handle insurance and taxes yourself, because it reduces their administrative work.
Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and United States Department of Agriculture (USDA) loans have their own rules about escrow. FHA loans typically require it. VA and USDA loans vary by lender. Conventional loans (those not backed by a federal agency) vary most widely — some lenders require it, others do not.
What happens if you pay insurance directly instead of through escrow
If your lender does not require escrow and you choose to pay your insurance premium directly, you are responsible for paying the insurance company on time, every time. Your lender will ask you to send proof of coverage — usually a copy of your insurance policy or a declaration page — before closing and then periodically afterward.
If you miss a payment and your insurance lapses, your lender can buy insurance on your behalf and add the cost to your loan balance. This is called force-placed insurance or lender-placed insurance, and it is much more expensive than a policy you would buy yourself. It covers only the lender's interest in the house, not your belongings or liability.
Paying directly gives you more control over which insurance company you use and what coverage you buy. But it also means you have to remember the due date and manage the payment yourself.
How escrow amounts are calculated and adjusted
Your lender estimates your annual homeowners insurance premium and divides it by 12 to get your monthly escrow payment. They do the same for property taxes. These are estimates, so the actual amount you owe may be higher or lower than what you pay each month.
Once a year, usually in the fall, your lender reviews what they actually paid out for insurance and taxes and compares it to what you paid in. If you overpaid, they refund the difference or credit it toward next year's payments. If you underpaid, they raise your monthly payment to make up the shortfall. This is called an escrow analysis.
If your insurance premium goes up significantly — because you filed a claim, because your home's value increased, or because your insurer raised rates — your monthly escrow payment will go up at the next analysis. Your lender will send you a notice explaining the change.
The difference between homeowners insurance and mortgage insurance
Homeowners insurance and mortgage insurance are two different things, and it is straightforward to confuse them. Homeowners insurance protects your house and your belongings from fire, theft, weather, and liability. It protects you and your lender. Mortgage insurance (or private mortgage insurance, called PMI) protects only the lender if you default on the loan. It does not protect your house or your belongings.
If you put down less than 20 percent on a conventional loan, your lender will require PMI. Like homeowners insurance, PMI can be part of your escrow account and included in your monthly payment. But PMI is not homeowners insurance, and homeowners insurance is not PMI. You need both if your down payment is small.
Once you have paid down your loan balance to 80 percent of the home's original value, you can ask your lender to remove PMI. Homeowners insurance stays required for the life of the loan.
What to do if you want to change your escrow arrangement
If your lender currently requires escrow and you later meet the conditions to opt out (usually by reaching 20 percent equity in the home), you can ask your lender to remove it. Contact your loan servicer — the company that collects your payments — and ask about their policy. Some lenders allow it automatically once you hit the threshold; others require you to request it in writing.
If you currently pay insurance directly and want to switch to escrow for convenience, your lender may allow this as well. Again, contact your loan servicer to ask. There is usually no fee to set up or change an escrow arrangement.
If you are shopping for a mortgage and want to avoid escrow, ask lenders upfront whether they require it and under what conditions. Some lenders are more flexible than others, and this can be a factor in choosing between offers.
Frequently Asked Questions
Can my lender force me to use escrow?
Yes, if your down payment is less than 20 percent or if your loan type requires it. Once you have built up equity or if your lender makes it optional, you can usually ask to pay insurance directly instead. Check your loan documents or call your loan servicer to find out what applies to your mortgage.
What if my insurance company cancels my policy?
If you are paying through escrow, your lender will find out when the insurance company stops paying claims. Your lender will then buy force-placed insurance to protect the house. You should contact your insurance company when ready to find out why coverage was cancelled and get a new policy in place as quickly as possible to avoid the high cost of lender-placed insurance.
Does my escrow payment change if I move to a different state?
Yes, because property tax rates and insurance costs vary by location. If you refinance your mortgage, your lender will calculate a new escrow amount based on your new address. If you are straightforward moving and keeping the same mortgage, contact your loan servicer to update your address and discuss any changes to your escrow payment.
What if I pay off my mortgage early?
When you pay off your loan, your lender no longer has a claim on the house and no longer requires homeowners insurance as a condition of the loan. However, you should keep insurance anyway to protect your own investment. Your lender will close the escrow account and refund any balance remaining in it.
Can I shop around for homeowners insurance if I am paying through escrow?
Yes. Even though your lender pays the bill, you choose the insurance company and the coverage. Shop for rates and coverage the same way you would if you were paying directly. Once you find a policy you want, give your lender the new policy information and they will switch the escrow payment to the new company.