As a condition of getting a mortgage, the lender requires you to purchase homeowners insurance. You pay the premium at closing and then every year after that. In some cases, the insurance premium could also increase your monthly payment. If you're wondering why, the answer is very simple: escrow.
In some cases when you secure a mortgage loan, the lender gives you the option of including homeowners insurance payments with your loan payments (principal and interest). The lender holds the funds in an escrow account, which it establishes to accumulate the money over time. The mortgage company then pays the homeowners insurance premium once the account reaches the required level. The lender also collects real estate taxes associated with the property in the escrow account.
The lender commonly divides your yearly premium into 12 equal payments for each month of the year. So for instance, if your homeowners insurance premium is $480 per year, the lender divides that into 12 equal payments of $40 per month. The lender adds that monthly cost to your principal and interest payment each month. The mortgage company lists detailed information about how much of your payment goes toward the insurance policy on your monthly statements. The lender also updates your account when it pays the premium to the insurance company.
In some cases, you have the option of paying your homeowners insurance premium separately from your mortgage payment. If you want to take this option, you must let the lender know before you close the loan. In other cases, the lender requires that you pay escrow along with your principal and interest payment as a condition of getting the loan. Either way, talk to your lender to find out the exact details of how you will pay your homeowners insurance before you close the loan.
Though the insurance cost increases your monthly payment, it's beneficial for a number of reasons. For one, it allows you to divide your insurance (and property tax) costs into smaller, more manageable payments. Some insurance companies do not allow you to divide your payments — they require a lump sum once or twice per year. It is also more convenient to deal with one company (the lender) instead of two (the lender and the insurance company).
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