Should You Include Your Homeowners Insurance In Your Escrow Account?

Many homeowners have a choice on how to pay their homeowners insurance. Including it in an escrow account is a popular selection, but excluding it from escrow is also an option. Some homeowners benefit from including their insurance in an escrow account, while others benefit from excluding it. Deciding which option is best for you ultimately depends on your ability to manage bills as well as your current and anticipated financial situation.

An escrow account is a bank account that a mortgage lender manages to help make it easier for homeowners to manage all of their home-related monthly expenses. These include property taxes, HOA payments, and homeowners insurance. Escrow accounts are required on every government-insured loan, including FHA. The exceptions are if your down payment is at least 20% and you have a conventional loan.

If you fall into the exception category, you may be able to exclude your homeowners insurance from your escrow account. In other words, you'll have to pay the insurance as a separate bill in addition to your monthly mortgage loan bill. That said, having these bills separated can have pros and cons for homeowners, but combining them can do the same.

Advantages of including your homeowners insurance with your escrow

Think of all your monthly bills that don't involve your home. Cell phone, auto loan, auto insurance, internet, streaming services, and so on. Managing all these bills can be difficult for some individuals, so adding a couple more mortgage-related bills can be even more challenging. This could increase the chances of a bill getting paid late or, worse, skipped entirely. Then you'll have to deal with late fees. Lumping your homeowners insurance into your escrow account means you only have to worry about one payment for your home. This ensures that it will always get paid automatically and on time when you pay your mortgage.

Another advantage of including the insurance with your escrow is that you can spread out your premium payments over 12 months. For a $250,000 home in the United States, a homeowners insurance premium is around $1,428 a year, on average, based on data from October 2023 (via Bank Rate). Not everyone can afford to pay that all at once or even in two or three payments, so having the option to make monthly payments is much more feasible.

Advantages of excluding your insurance from your escrow

Although including your homeowners insurance in your escrow account comes with some advantages, paying it separately can also be beneficial. One perk is that, unlike a mortgage bill, you can pay your homeowners insurance with a credit card. This means you can take advantage of certain awards associated with the card, including cash back, Amazon points, and gift cards, depending on the type of card you use.

A second benefit to consider when paying your insurance premium with a credit card — excluding it from escrow — is the option of 0% APR. Many credit card companies offer 0% APR on new accounts for select applicants. This could benefit homebuyers who anticipate some sort of financial increase in the future, such as a raise at work because it provides the option of small, interest-free monthly payments for up to 21 months.

Another perk to excluding your insurance from your escrow is that it lowers your mortgage payment. If you're the type of person who prefers to see a smaller mortgage payment every month, paying your insurance premium in one lump sum will give you that smaller payment. You may also have the option to pay your insurance premium quarterly or semiannually if you can't afford the annual payment.