Homeowners Insurance and Your Mortgage
Homeowners Insurance and Your Mortgage are closely connected because most mortgage lenders require borrowers to maintain insurance coverage on the property. If the insurance premium changes, the monthly mortgage payment may also change when insurance is paid through escrow.
Homeowners insurance generally protects the property against covered losses. A lender requires insurance because the property serves as collateral for the mortgage loan. If the home is damaged or destroyed, the lender wants assurance that the property can be repaired, restored, or otherwise protected.
MortgagePreCheck Tip: A homeowners insurance increase can raise the escrow portion of your mortgage payment even when the principal and interest portion of the payment did not change.
Homeowners Insurance and Your Mortgage Basics
Homeowners insurance is usually required when a home is financed with a mortgage. The policy commonly covers the dwelling, certain personal property, liability protection, and covered damage caused by events described in the insurance policy.
If the policy premium is paid through escrow, the mortgage servicer collects money each month and uses escrow funds to pay the insurance premium when it becomes due.
When the annual insurance premium increases, the servicer may increase the monthly escrow payment to collect enough money for the next premium.
Why Lenders Require Homeowners Insurance
Lenders require homeowners insurance because the property secures the mortgage loan. If the home is damaged, the lender’s collateral may be affected.
The insurance requirement is usually found in the mortgage, deed of trust, or other security instrument. These documents commonly require the homeowner to maintain insurance that meets the lender’s minimum coverage standards.
If coverage lapses or is cancelled, the lender may take steps to protect its interest in the property.
Why Homeowners Insurance Premiums Increase
Homeowners insurance premiums can increase for several reasons. Some increases are related to the property. Others are related to insurance market conditions or regional risk factors.
Common reasons insurance premiums increase include:
- Higher replacement-cost estimates
- Regional weather risks
- Insurance market changes
- Claims history
- Coverage changes
- Deductible changes
- Inflation in construction costs
- Policy endorsements or added coverage
- Carrier underwriting changes
How Insurance Affects Escrow
If homeowners insurance is escrowed, the servicer estimates the annual insurance premium and collects monthly escrow payments to cover that future cost.
If the insurance premium increases, the escrow projection may increase. The servicer may also collect additional money if the prior escrow balance was not enough to pay the new premium.
This can create an escrow shortage and increase the total monthly mortgage payment.
Homeowners Insurance vs. PMI
Homeowners insurance is not the same as Private Mortgage Insurance, commonly called PMI.
Homeowners insurance generally protects the home against covered losses. PMI generally protects the lender against certain losses if the borrower defaults and the property is sold for less than the amount owed.
A homeowner may have both homeowners insurance and PMI on the same mortgage statement. Each serves a different purpose.
Lender-Placed Insurance
Lender-placed insurance may occur when the lender or servicer believes the homeowner’s required insurance coverage has lapsed, expired, or does not meet the required coverage standards.
Lender-placed insurance can be significantly more expensive than a policy the homeowner obtains directly. It may also provide limited protection compared to a standard homeowners policy.
If lender-placed insurance appears on a mortgage statement, homeowners should review the notice carefully and provide proof of coverage if a valid policy already exists.
Documents to Review First
When homeowners insurance affects the mortgage payment, homeowners should compare the insurance documents with the escrow analysis and mortgage statement.
- Homeowners insurance renewal notice
- Insurance declaration page
- Current mortgage statement
- Prior mortgage statement
- Annual escrow analysis
- Proof of insurance
- Notice of lender-placed insurance, if applicable
- Mortgage or Deed of Trust insurance requirements
- Payment history from the servicer
How to Review an Insurance Increase
Step 1: Compare the current insurance premium with the prior year premium.
Step 2: Review the insurance declaration page and identify any coverage or deductible changes.
Step 3: Compare the escrow analysis with the insurance premium amount.
Step 4: Review the mortgage statement and identify how much of the total payment is escrow.
Step 5: Confirm whether the servicer paid the correct insurance premium.
Step 6: Contact the servicer in writing if the insurance amount or escrow calculation appears incorrect.
Questions to Ask the Mortgage Servicer
- What homeowners insurance premium was used in the escrow calculation?
- Did the servicer pay the insurance premium?
- Was there an escrow shortage caused by the insurance payment?
- How much of the monthly payment increase is caused by insurance?
- Did the servicer receive proof of insurance?
- Was lender-placed insurance added to the account?
- Can the servicer provide the escrow analysis and escrow payment history?
Questions to Ask the Insurance Company
- Why did the homeowners insurance premium increase?
- Did replacement cost coverage change?
- Did the deductible change?
- Were endorsements or additional coverages added?
- Was the increase related to claims history?
- Are discounts available?
- Can the insurance company provide a detailed renewal explanation?
MortgagePreCheck Tip: If your mortgage payment increased because of insurance, review both the insurance renewal notice and the escrow analysis. The insurance company explains the premium; the servicer explains how that premium affects escrow.
When Insurance May Require Closer Review
Homeowners insurance may require closer review when the premium increased sharply, when lender-placed insurance was added, when the servicer used the wrong premium amount, or when the escrow analysis does not match the insurance documents.
Closer review may also be appropriate if the homeowner changed insurance companies, changed coverage, refinanced, experienced a servicing transfer, or received conflicting notices from the servicer and insurance company.
Related Mortgage Education Center Articles
Why Did My Mortgage Payment Go Up?
What Is Escrow and Why Did It Increase?
Additional Educational Resources
Additional consumer mortgage information is available through the Consumer Financial Protection Bureau Mortgage Resources and general legal reference materials are available through Cornell Law School’s Legal Information Institute.
MortgagePreCheck Summary
Homeowners insurance can affect the monthly mortgage payment when insurance is paid through escrow.
If the insurance premium increases, the escrow portion of the monthly payment may also increase. If the servicer paid more than expected, an escrow shortage may also appear.
Understanding homeowners insurance and your mortgage helps homeowners review premium changes, escrow calculations, and lender insurance requirements more effectively.
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