Is Homeowners Insurance Part of the Mortgage Monthly Payment?

by Cheryl Withrow, Demand Media
    Homeowners insurance premiums are generally escrowed for future payment.

    Homeowners insurance premiums are generally escrowed for future payment.

    Owning a home is the American dream. A multitude of questions are inherent with the process that helps you fulfill that dream. When you find the house you want and start shopping for a mortgage, you’ll find most banks require an escrow account, which you fund, and they use, to pay your homeowners insurance. Escrow payments are included in your mortgage payment. In other words, when you make your monthly payment, you are more often than not paying your homeowners insurance premium at the same time.

    Escrow

    Making sure the asset, your home, is protected is the primary concern of the mortgage company. Since it’s your primary concern too, there should be no question that you would maintain insurance on your investment. Mortgage companies are leery, though; hence, the vast majority of home loans include a clause, which requires you to escrow your insurance payments. As a mortgagee, you are obligated to make a monthly payment equal to 1/12 the total amount of the insurance. This amount is placed in an escrow account and the annual insurance bill is paid from this separate account.

    Escrow Pros

    Escrowing insurance premiums takes the hassle out of paying the premium yourself. Besides, opting out of this basic requirement is probably more hassle that it’s worth, especially if you’re not prepared to post a 20 percent down payment and pay a substantial waiver fee. Your mortgage contract is a multifaceted document that includes much more than escrow, the elimination of which could jeopardize the entire deal.

    Escrow Cons

    If you have a problem with someone else using your money without compensation and you’re meticulous about saving for a substantial annual bill, then opting out of escrow may work for you. Getting the mortgage company to go along with your assessment of the escrow practice and your reticence to participate is another story altogether. In some cases, banks will waive the escrow requirement if you make a substantial down payment. Since banks make money on escrow, they will probably charge a fee for the waiver. Waiver fees run as much as 3/8 of a point, with one point equaling 1 percent of the loan amount.

    Bottom Line

    Principal plus interest plus escrow equals your mortgage payment, in most cases. If you buy into the homeowners insurance escrow equation, the transaction will move forward without a hitch because the lender makes money with your escrowed funds and both of you have the peace of mind knowing that the investment is covered in case tragedy strikes. If you take a stab at avoiding escrow and win, the insurance obligation is still in place, but you’ll have the wherewithal to invest the funds. Consequently, you’ll earn the interest on your investment instead of the mortgage company earning it for its own coffers.

    About the Author

    Cheryl Withrow is a writer in Michigan’s untamed Upper Peninsula. Following a teaching career she served alternately as editor of the "Washington County News" and the "Geneva County Reaper," and as associate editor of "Bay Life" magazine. Withrow holds a Bachelor of Science in business with a major in accountancy from Wright State University and a Bachelor of Arts in English from Ohio University.

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