Can Homeowners Insurance Be Included in Your Mortgage?
When you purchase a home with a mortgage loan, it's advantageous to have your real estate taxes and homeowners insurance included in your mortgage payment. These expenses aren't part of your principal loan amount and interest isn't assessed on them. Your lender can set up an escrow account that holds the extra you pay every month, so your costs for real estate taxes and homeowners insurance can be divided evenly over 12 months.
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Original Homeowners Insurance Policy
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Lenders require that a homeowners insurance policy be in place at the time of closing on a home mortgage loan. As a result, you'll pay one year's worth of homeowners insurance out-of-pocket before your lender sets up an escrow account on your behalf. By year two of your mortgage loan, and for the remainder of your loan, you'll have enough funds stored in your escrow account for your mortgage company to pay your annual insurance premium.
How An Escrow Account Works
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Your lender calculates your approximate annual real estate taxes and homeowner's insurance premiums and divides that amount by 12. Every month when your lender issues your mortgage payment, 1/12th of your property taxes and insurance costs are added to the total. Once you submit payment and principal and interest are paid on the loan, the remaining funds are added to your escrow account. Each time a property tax bill or an invoice for your homeowner's insurance is issued, your lender withdraws funds from your escrow account and sends payment to the proper vendor. Any excess funds remain in your escrow account until you payoff or refinance your mortgage loan.
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Mortgage Statements
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Your lender provides you with monthly and annual mortgage statements that show exactly how much money was withdrawn from your account to pay for homeowner's insurance, real estate taxes, principal and interest. Since homeowner's insurance is usually paid on an annual basis, some monthly mortgage statements will not show an activity in your escrow account. However, you must still include the extra money with every mortgage payment so you have enough money in your escrow account when your insurance premiums come due.
Homeowner's Insurance is Non-Deductible Expense
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Unlike mortgage interest and real estate taxes, homeowner's insurance is a non-deductible expense on your tax return. You cannot report homeowner's insurance as an itemized deduction on Schedule A of your federal tax return. Your lender-issued mortgage statements are especially helpful because they show what portion of your escrow account paid for real estate taxes and what portion covered your homeowner's insurance premiums. Mortgage statements should be kept and filed in case you are ever audited by the IRS.
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