Is Homeowners Insurance Part of the Mortgage Monthly Payment?
The mortgage payment that you make to your lender does not include homeowners insurance, which you must purchase separately. This insurance provides coverage for damage to your home from fire, wind, storms and similar risks. A policy will also protect the home's contents and provide liability coverage for accidents that may happen at the home.
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Considerations
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Most lenders will require that you purchase homeowners insurance so your investment, and the bank's, is protected in case of damage.
Front-End Ratio
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When lenders are considering how much they will loan you, one of the ratios they use is called the front-end ratio. This compares the monthly expenses associated with the mortgage to your total income, and most lenders want the expenses to be less than 28 percent. These expenses include the cost of homeowners insurance as well as the mortgage payment.
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Escrow Process
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When you are taking out a mortgage, you may be required to put money into an escrow account that will be used for your homeowners insurance and real estate taxes. Though some banks will let you skip this, they will usually raise the mortgage rate as a result.
Misconceptions
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Homeowners insurance differs from private mortgage insurance (PMI), which is part of your monthly mortgage payment. If you put down less than 20 percent of the home's value as a down payment, most lenders will require you to buy PMI. This protects the lender against your defaulting on the loan.
Recommendation
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When considering a home purchase, don't forget to include homeowners insurance when figuring your monthly housing costs, in addition to your mortgage payment and taxes.
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