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- Homeowners Insurance: A Loss of Use Explanation
Maintaining homeowners insurance is a key component in getting a mortgage. By naming your mortgage company as loss payee on your policy, the insurance company will pay your lender in the event something happens to your house. For both convenience and security, you can include your homeowners insurance in your monthly mortgage payment.
Why Include Homeowners Insurance
In many cases, including homeowners insurance isn't even your option. Since your house is collateral for the lender, the lender will often require that you not only maintain homeowners insurance, but that you make regular payments toward it. Just because such an arrangement is required, however, doesn't mean it can't be beneficial. By paying your homeowners insurance premium with your monthly mortgage payment, you never have to worry about forgetting a payment.
Naming Your Bank as Mortgagee
Before you even close on a loan, you have to make sure the bank is protected. When you are approved and ready to settle, call your homeowners insurance company. Tell the representative that you will be closing a loan and need to add your new lender as mortgagee. The insurance needs to cover at least the loan amount. Coverage beyond the loan amount isn't the bank's concern. By naming the lender as mortgagee, you ensure that the insurance company will satisfy the bank's interests first.
Setting Up Escrow
At closing, you will set up an escrow account for your homeowners insurance payments. You will sign an escrow agreement and pay your first year's premium in full. The reason it's handled this way is that you pay for your first year of coverage in advance, then spend the next 12 months building toward the following year's premium. You will also sign an escrow agreement, which will detail the handling of the account and cement your promise to pay your homeowners premium with your mortgage payments.
Your next year's premium will be divided over 12 months. This means if your yearly premium is $600, you will pay $50 per month with your mortgage payment. If, for any reason, you change your coverage, you will typically end up with an escrow shortage or surplus. The bank will determine this during its yearly escrow analysis. This is a process in which the bank reviews your escrow account to make sure everything is in order. If your coverage goes up, you will be faced with a shortage. You will have the option to pay in full up front, or spread the additional amount over the next 12 months. If you're lucky enough that your coverage has gone down, you will have a surplus, in which case you will be pleased to find a reimbursement check in the mail, several weeks after the escrow analysis.