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For many homeowners, expenses such as homeowners insurance and property taxes are included as part of their mortgage payment. Your mortgage lender might require this arrangement, particularly if you have a government-backed mortgage or put less than 20% down. But even if it's not required, combining several bills into one monthly payment could make managing your housing expenses easier.
What Is Included in Your Mortgage Payment?
Mortgage payments can include money for your principal, interest, taxes and insurance (PITI).
Here's a closer look at each part of your PITI:
- Principal: The mortgage's principal is the amount you borrowed. Part of each loan payment pays down the principal, allowing you to pay off the loan over time.
- Interest: Part of your payment will also go toward the interest that accrued since your previous payment.
- Taxes: Required property tax payments that you may pay to your local government.
- Insurance: Depending on your down payment amount and mortgage type, you may pay one or more different types of insurance as part of your monthly payment:
- Homeowners insurance: Homeowners insurance can protect you from covered incidents such as windstorms, theft, vandalism and liability lawsuits.
- Mortgage insurance: Mortgage insurance protects the lender rather than the homeowner by paying the lender if you default on the loan. You might be required to pay for mortgage insurance depending on your down payment and the type of mortgage you have.
- Additional insurance: Other types of insurance may be required based on the home's location, such as flood or hurricane insurance. There are also optional policies, such as earthquake insurance.
Your principal and interest payments go directly to your lender. Annual or biannual expenses including property taxes and insurance may be prorated and added to your monthly mortgage payment. The lender or loan servicer puts those expenses in an escrow account, which is essentially a savings account that your mortgage servicer manages. It then uses the money to pay the bills on your behalf.
Common housing expenses that aren't part of your mortgage payment include utility bills, maintenance and HOA fees.
Because tax or insurance expenses may change from year to year, your monthly mortgage payment may rise or fall. For instance, you could try to shop for homeowners insurance to lower your premiums, which would ultimately lower your mortgage payments. But you may need to request a review or wait for an annual escrow review for the changes to take effect.
During an annual escrow review, your servicer also tries to determine if there's too much money in the account for the coming year (an overage) or too little (a shortage). You could get a refund if there's an overage. If there's a shortage, you may be able to make an upfront payment or have a portion of the shortage added to your upcoming monthly mortgage payments.
Should You Include Homeowners Insurance in Your Mortgage?
Lenders want to be certain that your property taxes and homeowners insurance premiums are paid, as a lapse could put their investment in danger.
You may be able to opt out or cancel your escrow account and pay for your homeowners insurance and property taxes on your own. This can depend on the type of mortgage you have, the size of your down payment and your equity.
If you have a conventional loan, you may qualify for an escrow waiver if you put at least 20% down or have a history of making on-time payments. FHA loans may require escrow accounts for the life of the loan, while VA loan escrow requirements can vary by lender.
Even if it's not required, some people prefer using escrow to pay for their homeowners insurance. You'll have fewer bills to manage and it can be easier to make monthly payments than large annual or biannual payments. You also may have to pay a fee or receive a higher interest rate if you don't use an escrow account.
Still, there are times when paying your homeowners insurance directly might be preferable. For example, if you only have to pay premiums annually, you could make short-term investments with the money throughout the year.
What if My Mortgage Company Fails to Pay My Home Insurance?
If you have an escrow account and are paying your mortgage on time, the mortgage company could have a legal obligation to pay your home insurance premiums. It may even be required to make the payments on your behalf if there isn't enough money in the account.
But mistakes can happen. If you see that a payment was missed and the policy is still in place, reach out to your mortgage company and ask it to correct the mistake right away. If it doesn't, you may want to send a separate "notice of error," and the company may have to make the payment and cover related fees.
If your homeowners insurance policy was canceled because of nonpayment, you may still be able to reinstate it after the past-due balance is paid. You may also want to contact an attorney if this happens after your policy lapsed because the mortgage company didn't pay your insurance premiums.
Consider What Works Best for You
Many homeowners pay for their homeowners insurance and property taxes as part of their mortgage payment. But your options can depend on the type of mortgage you get, and they may change as you pay down your loan or if you refinance your loan.
When you have a choice, consider whether you want to manage the bills or have the mortgage service pay them on your behalf. Just remember to occasionally check with your insurance provider to make sure it received the payment.