Is Home Insurance Included in Your Mortgage?

When you get a mortgage on a home, the lender requires you to buy a homeowners insurance policy. Depending on several factors, your lender may require you to pay your home insurance premiums through an escrow account. Escrow accounts ensure that insurance premiums are paid on time, but they also allow you to avoid a large one-time annual payment.

If you don't have an escrow account and don't pay your home insurance premium or property taxes, the lender can take steps. The lender can add an escrow account to your mortgage or add delinquent amounts to your mortgage balance. In certain cases, a lender may also buy a homeowners policy that costs more than what you bought and then send you a bill.

What is Home Insurance?

Home insurance, also called home insurance, covers your home, its contents, and more. You pay an annual premium for the coverage and the insurer pays the covered losses up to the limits of your policy. For example, if a fire damages your home, your homeowners policy can help repair it and pay to replace damaged items like carpets and furniture. Most standard home insurance includes six coverages:

• Dwelling
• Other structures
• Personal property
• Loss of use
• Personal liability
• Medical payments to others

The law does not require homeowner's insurance. However, if you get a mortgage, the lender will ask you to buy a policy and keep the coverage until the loan is paid off. Many lenders require you to pay for your home insurance through an escrow account.

Homeowners Insurance and Escrow

An escrow account is an account that your lender or mortgage servicer uses to pay for critical and recurring property-related expenses. A mortgage escrow account generally collects and holds funds to pay for homeowners insurance and property taxes.

An escrow account allows you to spread insurance and tax payments instead of paying them in fixed amounts each year. By requiring an escrow account, the lender has the added assurance that insurance and tax payments are made on time.

When insurance payments expire, you risk losing coverage. If you don't pay your property taxes on time, the government can place a lien on your home.

The mortgage servicer manages the escrow account. Your only obligation is to make regular monthly payments and to review your warranty statements to make sure payments are made in full and on time. Owner's premiums and annual property taxes vary. When changes occur, the mortgage servicing company will adjust the amount you must pay into the escrow account.

Federal law requires mortgage servicers to provide an annual statement of escrow account activity. The statement will include your escrow payments and the escrow account balance. It will also include any anticipated increases or decreases in escrow deposits and their effective dates.

How to set up an escrow account

When an escrow account is required, the lender will establish it for you. If an escrow account is not required, the lender will generally give you the option to open one.

Lenders require escrow accounts for a number of reasons. In 2013, the Consumer Financial Protection Bureau issued a rule under the federal Truth in Lending Act that requires lenders to collect collateral payments for at least five years on higher priced home loans (HPML). HPMLs are loans with an APR that is a number of percentage points above the Average Principal Offering Rate (APOR), which is an average of mortgage interest rates, fees, and other terms for highly qualified borrowers. HMPLs include:

• Prime Mortgages: With a Prime Mortgage, the lender is the first to receive payment after foreclosure. A prime mortgage is considered more expensive if its APR is at least 1.5 percentage points higher than the APOR.
• Jumbo Loans: Jumbo First Collateral Loans are priced higher if their APR is at least 2.5 percentage points higher than the APOR.
• Subordinate collateral mortgages: Sometimes called "collateral" or "collateral" mortgages, subordinate collateral mortgages are second in line after foreclosure. These types of loans are considered more expensive when your APR is at least 3.5 percentage points above the APOR.

If you don't have an escrow account requirement

Typically, if you make a down payment of at least 20%, you can choose whether to pay your insurance premiums and property taxes through an escrow account. But if you don't have an escrow account, you are responsible for paying your home insurance premium and property taxes in full.

Mortgage brokers may waive the escrow account requirement if:

• You ask, the laws do not prohibit it and you are up to date with your mortgage
• Your mortgage balance is less than 80% of the home's original appraised value
• You have not been more than 30 days late in your payment in the last six months.

Home insurance vs. private mortgage insurance

Your lender may also require you to pay for private mortgage insurance (PMI). PMI protects the lender if you miss your mortgage payments. Collecting insurance and tax payments through an escrow account protects the lender from tax burdens and uninsured losses, while PMI protects the lender if they fail to pay their mortgage.

Enjoy Watching This Video About Insurances

Source: ehowfinance

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