Is Homeowners Insurance Included in Closing Costs?

The fun part of buying a house – looking through different places, imagining how you’ll decorate, getting new ideas – must come to an end sometime. Eventually, you’ve got to climb over a wall of paperwork before you land in your new home.

You know you’ve got to get homeowners insurance at some point before you move in. But when you need to pay for it isn’t always immediately clear. Is it part of the small litany of closing costs? When do you pay it? Let’s find out.

If you’re getting a mortgage on the house you’re buying, your lender usually requires you to pay your first yearly homeowners insurance premium before or at closing. The lender does this to protect the investment on their end. Paying your home insurance upfront can be done with or without an escrow account.

If your new house was destroyed the first week you owned it, your lender would never recoup the money you owe without insurance. Your provider would pay for a new home given that the damage is covered, which would also be rebuilding the lender’s investment. Insurance reimbursing the homeowner is good for the lender.

And when you still hold a mortgage on the property, the claim payments are actually made out to the lender and not you, since they technically still own the property.

Homeowners insurance is usually broken down into monthly payments, but it’s required upfront when closing on a new house to guarantee you don’t get behind on your payments, leaving your lender exposed.

Closing costs are like the final obstacle standing between you and the long-awaited moment you own your new house. Unfortunately, there are quite a few of them. Application, title, realtor and attorney fees are just some of the payments you have to oblige. While homeowners insurance and property taxes are expenses you pay at closing, there’s a slight distinction to be made.

Most closing costs are associated with securing your mortgage loan while paying your homeowners insurance and taxes upfront are prepaid costs that you’d have with or without a loan (given you opted to get homeowners insurance without a loan). Paying for your insurance and taxes early shouldn’t sting as much as the other closing fees because you would have had to pay them anyway.

If you have an escrow account, your lender will have you put the money there, and the lender will pay your first year’s premium through the account. If you don’t have an escrow account, you’ll need to show proof that you paid your first year’s insurance premium at closing.

Keeping track of all the documents and payments you have to make can be tricky. Be careful not to confuse your homeowners insurance with your private mortgage insurance (PMI). You’ll have to make a PMI payment, too, if you put down less than 20% on your house. 

Lenders mandate PMI when you don’t put a lot of money down on your home to protect their investment. With relatively little money down, you represent a larger financial risk. You may not be as incentivized or willing to pay back the loan on time, so your lender instituted PMI to reduce their financial risk. PMI protects your lender on the mortgage only; it doesn’t have anything to do with your homeowners insurance or protection of your house. 

Your homeowners insurance and your mortgage payment are not the same things. But, if you’ve got an escrow account, you make one monthly payment that goes towards both. In this way, escrow accounts can help you stay on top of your house payments. You contribute the money to your escrow account, and your lender pays what you owe accordingly.

Most of your monthly escrow payment goes toward your mortgage, but a portion of it gets set aside for your home insurance and taxes. That way, when your annual insurance premium is due, you’ve built up an amount of money to pay it. This is also how prepaid homeowners insurance at closing works.

You pay a year’s insurance premium at closing, but you’ll also begin to make monthly payments on top of that. So, as you’re closing on your house, you may see that you’re making monthly insurance payments to your escrow account even though you just paid for a year of insurance. Why?

Well, this happens so at the start of the next effective year of your insurance, when your annual insurance payment is due a year after you bought your house, you’ve already built up enough money in your escrow account to pay for that year. 

The money for your premium is already in your escrow account, because you’ve been paying monthly, and your lender sends your payments. You don’t have to worry about it, and you never get behind on your payments.

Of course, all this is possible without an escrow account, too. You’ve just got to remember to do it. Many people don’t get an escrow account when closing on a new house.

They simply pay one full year of homeowners insurance up front and then remember to make their insurance payments, mortgage payments and all other costs monthly. An escrow account just makes things easier to track for you and your lender.

Those who buy a house with cash don’t need to worry too much about paying for homeowners insurance at the closing. If you buy a home with cash, you don’t need a home loan. Without a home loan, there won’t be a lender requiring you to pay for insurance up front.

In some of the closing documents, you might see the term “hazard insurance,” which is just another name for homeowners insurance.