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How often you make your homeowners insurance payments depends on whether you pay your insurance provider directly or through an escrow account with your mortgage lender. Even if you can choose how often to pay your insurance premium, paying monthly may not always be the best choice. Here's what to know about paying homeowners insurance.
How Homeowners Insurance Is Paid
Most lenders require homeowners insurance when you take out a mortgage. That way, you—and the lender—are covered if a fire, hailstorm or tornado damages or destroys your property. Once your home is paid off, keeping your homeowners insurance protects you from financial catastrophe if something were to happen to your home.
When you take out a mortgage, your lender may require you to set up an escrow account to ensure bills associated with owning the home are paid, including insurance. With an escrow account, you'll make one monthly payment to your lender that includes your loan payment as well as insurance, property taxes and possibly other expenses. Then your lender will pay your insurance annually out of your escrow account.
If you own your home outright or choose not to have an escrow account (and are not required to), you may have more flexibility with how often you make your home insurance payments.
If You Have an Escrow Account
Many lenders require you to have an escrow account, especially if you have less than 20% equity in your home or you have a government-backed loan (like an FHA loan). You also can elect to open an escrow account with your loan servicer, even if they don't require it. If it's easier for you to manage paying smaller amounts monthly than large annual or semi-annual insurance or tax payments, an escrow account can help.
With a mortgage escrow account, your annual mortgage premium is divided into 12 smaller payments that your lender adds to your monthly loan payment. Your lender then pays your homeowners insurance premium, property taxes and any other specialty insurance premiums out of this account when due. So even though you are paying your insurance premium monthly, your lender makes the payment once a year to your insurer.
If You Don't Have an Escrow Account
If you are not required to have an escrow account as part of your mortgage and elect not to request one, you will pay your homeowners insurance premiums directly to the insurance company.
How often you pay depends on your insurance company's requirements and possibly your personal preference. You may opt to pay your bill annually, semi-annually, quarterly or monthly if you're allowed to do so. Check your homeowners insurance policy and your insurance company's terms and conditions to decide what option works best for you.
Should You Pay Homeowners Insurance Monthly or Annually?
If you own your home outright or do not have an escrow account with your lender, you'll pay your homeowners insurance premiums directly to the insurance company. While you may be allowed to pay your premiums monthly, you could save money by opting to pay in one annual lump sum instead.
Many insurance companies offer a discount if you pay your premiums annually and may add an installment or convenience fee to monthly payments. An installment fee covers the cost of processing additional payments, typically on a monthly or quarterly basis. While a small fee may not seem like much, it can add up over time.
If paying one large lump sum each year is difficult, consider taking your annual premium and dividing it up into 12 "payments" that you stick into a separate sinking fund. This allows you to budget all year long for that one-time expense.
One thing to note, though: You will likely need to pay your first independent annual homeowners insurance premium upfront, so prepare for this expense once you pay off your home or if you're planning to cancel your escrow account.
The Bottom Line
Some lenders may require you to pay your home insurance monthly as part of the mortgage agreement. But if you don't have an escrow account or own your home outright, you may be able to choose to make monthly payments. Just keep in mind that you may be required to pay a convenience or installment fee if you want to pay monthly.
Whether you pay your home insurance monthly or not, your credit score plays a part in getting approved for a mortgage. Check your credit report and your credit score for free with Experian.