Congratulations! After countless hours pouring over listings, visiting open houses, and scrutinizing disclosure forms, you’ve had an offer accepted on your dream home. You’re in the home stretch, but there are still a few more things to do before you can start picking out curtains—among them, securing a homeowner’s policy, and deciding how you’ll pay for that policy once you have it.
Why you need homeowners insurance
Homeowner’s insurance protects you in the case of a disaster or accident on your property, but along with simply being a good idea, obtaining a homeowner’s policy is a standard requirement on home loans.
Since your lender is using your new home to secure your loan, it is in their interest to make sure that your property value remains close to original amount lent for purchase. While your lender has little control over the whims of the market, it can make sure that your house or condo doesn’t lose significant value in the case of a disaster or accident by requiring you to carry a homeowner’s policy.
Your lender will require proof of homeowner’s insurance before they agree to release funds to pay for your new home, so securing a policy should be a priority as you approach closing.
Paying for insurance: escrow or no?
There are two ways to go about paying for homeowner’s insurance attached to a loan.
The first and most obvious method is to make payments directly to your insurance carrier. While your carrier might offer other options, homeowners insurance is traditionally paid in a lump sum once a year—requiring the homeowner to have a lump sum set aside for the purpose.
Direct Payment is good for:
- Very financially secure homeowners who want more control over their funds
- Homeowners who can set aside lump sums for their policies, and who would like to accrue interest on those funds
Note: The escrow account discussed here is different from the account used to transfer funds when closing on your home.
Escrow is an account—typically opened when you close on your home—that your lender uses to collect funds for your mortgage, insurance payments, and property taxes, ensuring that the funds are available when it comes time to pay. Rather than handling these costs in lump sums when they are due, the homeowner pays small monthly sums into the escrow account, which the lender then uses to pay taxes and insurance costs on the property—as well as to collect on the mortgage. While escrow is sometimes elective, there is a strong possibility that your lender will require the use of an escrow account.
Your monthly payment
If you choose or are required to use escrow, your lender will calculate your payment based on three factors.
- Your estimated property taxes.
- Your mortgage costs, including premium and interest.
- Your homeowner’s insurance costs.
Since some of these amounts are changeable, there is a chance that you will pay more than what is needed to cover these costs into escrow, or too little. If there are leftover funds you will be refunded by your lender at the end of the year. If funds were insufficient, you will be required to pay the remainder—which is usually calculated into your monthly payments for the next year.
Escrow is a good option for
- First-time homebuyers
- Those who might have a hard time budgeting their insurance premiums
- Homebuyers whose lenders require the use of an escrow account.
Get a quote
While methods of paying for your policy vary, the need for homeowner's insurance to protect your home and secure your loan is universal. Whatever your needs, a qualified insurance professional can help make sense of your options and help you find a favorable rate—all in time for closing. We hope you’ll consider Moreland for your homeowner’s insurance needs. To obtain a homeowner's insurance quote online please visit our online portal, we’ll look forward to assisting you with your policy.