Insurance Q&A: “Is homeowners insurance included in the mortgage?”
In order to answer this question, it’s important to point out the difference between mortgage insurance and homeowners insurance.
The purpose of mortgage insurance is to protect the bank that loaned you the money to purchase your home in the event of default.
Mortgage insurance is necessary for first mortgages in excess of 80% of the total appraised value of your home.
Homeowners insurance, on the other hand, protects homeowners in the event a home is damaged or destroyed, and also provides liability coverage.
Mortgage companies will not approve your loan unless you have a homeowners policy in place; it’s necessary to protect their interest in your home.
Imagine if your house burnt down one week after you bought it; you wouldn’t want to continue paying for it, and the bank would be out of luck.
Ultimately, your homeowners insurance is not included in your mortgage, meaning your lender will not actually insure your home or pay claims against your insurance policy.
But your mortgage lender may partner with an insurance company to offer the service (be sure to shop around though!).
What about impounds?
However, it is possible to have your homeowners insurance premiums and property taxes included in your monthly mortgage payments through a process called impounding.
Basically, your mortgage company allows you to prepay the cost of your homeowners insurance and property taxes by collecting the money from you over the course of the year.
The lender then sends the money to your insurance company and property tax assessors.
Some homeowners may find it convenient to pay the cost of these bills in smaller increments throughout the year versus all at once annually.
Keep in mind that impounding your taxes and insurance may reduce your ability to earn interest on your money over time; instead, the lender receives all that potential interest.
Conversely, if you don’t impound your homeowners insurance and taxes, you may forget to make a payment, so choose wisely.
