How Is Homeowners Insurance Paid?
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Homeowners insurance can pay to repair or replace your home after a fire, theft, or certain natural disasters. Without it, you’ll have to foot the repair bills if your home is damaged. So it’s important to maintain an active policy, and lenders may even require it as a condition of the home loan.
You can pay your homeowners insurance premium either by using an escrow account or sending payments directly to the insurance provider. Both options come with pros and cons.
Here’s how to pay your homeowners insurance:
How is homeowners insurance paid?
You can pay your homeowners insurance premiums with an escrow account set up by your lender or by sending payments directly to the insurer.
With the first option, your loan servicer collects your monthly mortgage payment each month and puts a portion of it into an escrow account. The loan servicer pays the insurance bill annually on your behalf when it’s due.
If you choose to make direct payments to the insurance carrier, you can typically choose to pay either monthly, quarterly, semiannually, or annually. You’ll likely need to send proof of homeowners insurance to your mortgage lender each year.
Credible can help you compare home insurance rates across dozens of carriers. Our process is fully online, and you can buy a policy instantly.
Paying with an escrow account
An escrow account is essentially a type of savings account that’s managed by a neutral third party. Your mortgage lender may set up the escrow account during the home purchasing process. Lenders prefer using escrow accounts. It’s an easy way to protect their investment and make sure the borrower pays their property taxes and homeowners insurance.
Each month, your mortgage payment may combine principal, interest, property taxes, homeowners insurance (including separate policies like flood insurance), and private mortgage insurance (PMI). Your loan servicer — which is the company that processes your mortgage payments — takes the tax, homeowners insurance, and PMI portions and adds them to your escrow account. When the homeowners insurance premium is due, your loan servicer withdraws money from the escrow account and pays the bill on your behalf.
Benefits of an escrow account
Escrow accounts are a common financial tool that mortgage lenders and servicers utilize, and they provide buyers with certain benefits, including:
- On-time payments: An escrow account automatically pays your homeowners insurance bill, which helps you avoid late fees and ensures you maintain coverage on your home.
- Easy to use: Having another person pay the bill is typically easier than paying it yourself because you don’t have to keep track of multiple payments and due dates.
- Helps you plan for potential payment changes: Homeowners insurance premiums sometimes fluctuate over time. If you use an escrow account, the loan servicer will typically cover the difference temporarily if the account is short one month. The company may increase your monthly mortgage payments going forward to ensure you have enough for the next payment.
Drawbacks of an escrow account
Escrow accounts also come with their share of drawbacks, such as:
- Higher monthly payments: Because you’re combining the mortgage principal and interest with insurance and property taxes, you’ll pay more in one lump sum than if you pay the bills separately. You may choose to pay your insurer directly if you prefer spreading out the payments over the course of a month or longer.
- Potential estimate inaccuracies: Your escrow payments are estimates based on your most recent property tax and insurance premiums, so there may be overages at the end of the year — or you may be short on funds. In some states, the loan servicer is required to pay you interest on the escrow account and refund any overages at the end of the year. But you may prefer putting the funds to better use, such as short-term investments.
- May be hard to get rid of: It may be difficult to close an escrow account and receive the balance (if there is one) once you have the account established.
Paying directly to the insurance carrier
Not everyone uses an escrow account to pay for homeowners insurance. Instead, you might choose to pay the insurance provider directly — whether online, by check, or over the phone — and set up a payment schedule based on your preferences.
Benefits of paying directly
As with escrow accounts, paying your insurance provider directly has its share of benefits:
- Budget flexibility: Paying your mortgage separately from the insurance allows you to spread out the bills, reduce your monthly mortgage payment, and save for the annual insurance payment if you need more time coming up with the money.
- Payment method choices: Insurance providers usually let you choose from several payment methods, such as direct withdrawal, debit card, credit card, or check. This provides more flexibility. For example, you might prefer to pay with a credit card to earn rewards points on the cost of your premium.
- Easy to add or cancel coverage: If you want to add or remove homeowners insurance coverage, you can arrange the change with the insurer and pay the balance or receive a refund. Canceling a home insurance policy usually only requires a phone call to your provider. There might be more steps involved when closing an escrow account.
Check Out: How Much Homeowners Insurance Do I Need?
Drawbacks of paying directly
Paying directly also has a few negatives that you should be aware of:
- Not automatic: Without an escrow account, you’ll be responsible for paying insurance and property tax bills on time. If you miss a payment, you’ll likely have to pay a late fee.
- Potential budget difficulties: The amount you pay for homeowners insurance can vary each year. So if you saved a lump sum based on your last premium, you may not save enough for the next one. You’ll need to come up with the difference and plan for potential future increases.
- Miss out on discounts: Some homeowners insurance providers offer a discount if you pay your policy in full every year. If you pay the provider periodically throughout the year, you’ll miss out on this discount.
It’s important to have homeowners insurance and pay the premium on time to keep your account in good standing. If you’re looking for insurance, start by comparing multiple providers with Credible. We’ll help you find a great match for your situation.
The Credible marketplace, which includes insurance services by Young Alfred, makes it easy to find a carrier and policy that’s right for you.
Disclaimer: All insurance-related services are offered through Young Alfred.
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