How Is Homeowners Insurance Paid For?

Escrow accounts, lump sums, and closing costs…oh my!

If you’re a homeowner, you might already know that there are two ways of paying for homeowners insurance: either through direct payments to your insurance company, or via an escrow account set up with your mortgage lender.

But if you’re a first-time homebuyer—or even a veteran homeowner—you probably have more questions about how paying your homeowners insurance premium actually works.

So let’s unpack what you need to know about paying for home insurance.

Paying for homeowners insurance 101

what you need to know about paying for homeowners insurance

Most homebuyers don’t have enough cash on hand to pay for 100% of the cost of a new home up-front, so they finance their purchase with a mortgage loan.

In order to get approved for a home loan, your lender will require you to purchase a homeowners insurance policy. Even if you’re one of the few homeowners who doesn’t have a mortgage loan, it’s still essential to get insurance coverage. Otherwise, you’d be responsible for 100% of the costs should something bad happen to your home or your personal property, or if you’re held liable for property damage or injuries to others. (Read more about what homeowners insurance covers.)

While you might be able to pay your premium directly to your insurance company, many homeowners find it convenient to pay for an insurance policy through the escrow accounts they have with their mortgage lender. Depending on your mortgage company, you might be required to pay your homeowners premiums via escrow—but what does that mean?

What is an escrow account and how does it work?

An escrow account is an account set up through your mortgage company, and the money in it is generally used to pay for your homeowners insurance premium and property taxes.

If your down payment was less than 20% of your home’s purchase price, your lender will typically require you to pay for home insurance via escrow. But you may have a choice of payment options if your down payment was higher than 20%. How you’ll pay is up to your lender—not your insurance company.

Your escrow payments, which would likely include those insurance premiums and property taxes, will be added to your monthly mortgage payment as a lump sum.

But there’s a bit of a catch: In your first year of owning a home, you’ll be making escrow payments for the following year,  not the first year itself.

So what about paying for those first 12 months? 

The first year of homeowners insurance is paid as a lump sum, even if after that you’ll be paying on a monthly basis. Your homeowners insurance costs will often be included in the closing costs on your home. 

But don’t just assume this is the case.  Clarify with your lender how your first year will be paid for. This information is usually listed in your new home’s closing documents.

It’s important for homeowners to get clarity from their mortgage lenders about their home insurance payments. If you prefer, you can share your lender’s contact information with your insurance provider, and your insurer can then contact your lender to confirm how your first year of payments will be handled.

What if you refinance your home with a new mortgage company?

paying for homeowners insurance after refinancing home

Should you switch lenders, you’ll have a new escrow account, and it’s essential to update your homeowners insurance company with your new lender’s details.

Otherwise, your insurer won’t be able to send your lender the required documents to collect your payment.

Even if you haven’t refinanced, new and existing homeowners might want to check in annually with their lender and insurer to make sure that everyone’s on the same page, and that nobody is missing any crucial information.

Before we go…

Whether you’re getting ready to close on your first home or you’re already a homeowner and you’re considering switching insurance companies, you want a homeowners policy that provides the coverage you need for a fair price.

Lemonade utilizes AI technology to offer amazing coverage at a reasonable rate. And we’re happy to handle communication with your mortgage lender, so you’re never in the dark about paying for your coverage.

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A few quick words, because we <3 our lawyers: This post is general in nature, and any statement in it doesn’t alter the terms, conditions, exclusions, or limitations of the policies issued, which differ according to your state of residence. You’re encouraged to discuss your specific circumstances with your own professional advisors. The purpose of this post is merely to provide you with info and insights you can use to make such discussions more productive! Naturally, all comments by, or references to, third parties represent their own views, and Lemonade assumes no responsibility for them. Coverage may not be available in all states. Please note that statements about coverages, policy management, claims processes, Giveback, and customer support apply to policies underwritten by Lemonade Insurance Company or Metromile Insurance Company, a Lemonade company, sold by Lemonade Insurance Agency, LLC.  The statements do not apply to policies underwritten by other carriers.

Luke Brinker

Luke Brinker is Product Communications Lead, Homeowners and Renters, at Lemonade. Born in the Midwest, where he began browsing online property listings way before Zillow made it cool, he’s since made his way to the Middle East, where he spends his days thinking big about renters and homeowners insurance.


Please note: Lemonade articles and other editorial content are meant for educational purposes only, and should not be relied upon instead of professional legal, insurance or financial advice. The content of these educational articles does not alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade, which differ according to your state of residence. While we regularly review previously published content to ensure it is accurate and up-to-date, there may be instances in which legal conditions or policy details have changed since publication. Any hypothetical examples used in Lemonade editorial content are purely expositional. Hypothetical examples do not alter or bind Lemonade to any application of your insurance policy to the particular facts and circumstances of any actual claim.