Homeowners Insurance and Mortgages: How They Work Together
Whether you’re a first time home buyer or you’ve done it before, it’s a very exciting time! But before you move into your new home, you have some paperwork to manage. Navigating all of the requirements during a home sale can be confusing, especially when it comes to your mortgage and your homeowners insurance. Luckily you have a mortgage lender to help you understand your loan and your American Family Insurance agent to answer your insurance questions. But let’s look at some of the basics and see if we can shed some light on the subject.
What Is Homeowners Insurance?
When you buy a home there are two types of insurance that come into play. By defining homeowners insurance and private mortgage insurance (PMI), you’ll get a clearer picture of what your insurance obligations are.
PMI. This type of insurance is actually designed to protect the mortgage lender — not you. PMI is typically required for borrowers who can’t make a down payment on the home of 20% or more. The lender wants this so they know they’re covered if you stop making payments on your loan. This type of insurance may or may not be required for your mortgage. PMI is unrelated to the protection of your home so it’s not homeowners insurance.
Homeowners Insurance. This is the insurance that you’re going to rely on if something happens to your home, your personal property and sometimes even other people on your property. Your mortgage lender will require homeowners insurance because they want to know that their investment is protected. But this time you’ll also want that peace of mind.
What Is an Escrow?
Now that we know what the two types of insurance are, let’s get back to the question of homeowners insurance being included in your mortgage. Paying your homeowners insurance (not your PMI) as part of your mortgage is called having an escrow. Some borrowers will be required to escrow their insurance into their mortgage payments while other people won’t have to. If you haven’t paid a 20% or more down payment on the home, chances are that your lender will require it. They might also have you escrow your property taxes into your mortgage.
If you’ve made that down payment, you can usually choose whether or not you want to pay your insurance with your mortgage. Some homeowners find it easier to include it with the mortgage because it’s one less bill to worry about. For others, they prefer to pay their insurance in one lump sum or have more control over when payments are made. Either option is find — just choose how you prefer to manage your bills.
Whether you’re going to have your homeowners insurance rolled into your mortgage payments or not, it’s best to talk to your insurance agent long before you sign the lender’s paperwork. This way, your new homeowners insurance policy is ready and waiting for you when you walk through the front door.