When closing on a house, you’re going to come up against some hefty fees during the closing process. Lender’s fees, third-party fees, and your downpayment will all be included in your closing costs. But will your insurance premium be part of your closing costs?
That is up to you. Your mortgage lender will probably require you to purchase and prepay an insurance premium that covers the minimum coverage before they agree to loan to you. Unless you’re paying in full with cash, you will have to pay for homeowners insurance either before or during the closing process.
Advantages of paying up-front
It’s helpful to you to pay your insurance premium in full up-front and before closing costs. By doing so, you exclude your insurance premium from being added to your closing costs which will already include a number of other fees.
Paying up-front will also allow you to pay using a credit card or bank funds whereas paying the premium during the closing process will only allow you to pay using certified funds. Paying using a credit card allows you to break up your payment but also comes with the threat of hurting your credit score and affecting your mortgage loan. Be cautious and know which option is best for your situation.
What if you need to pay in closing costs?
Sometimes paying the insurance premium in closing costs can be advantageous as it gives you another bargaining choice with your lender. However, it’s important to know that you are restricted to using certified funds for payment. This means that you are only able to use money that is currently your own and not money that you will have in the future cutting out the option of credit cards.
Your mortgage lender or insurance company may ask you to set up an escrow account to pay for the insurance premium. An escrow account is set up for you to put money in that will slowly be used to pay back fees such as homeowners insurance, mortgage, and property taxes so you avoid paying large sums at a time.
Setting up an escrow account will require you to pay back the insurance premium alongside your mortgage and other fees set up during the closing process. If you’re unable to pay the insurance premium in full, it’s not the end of the world. All it means is that you’ll be added another cost onto the initial closing costs.
Setting up an escrow account will help you in the end as it will make your payments more manageable and relieve you of some financial stress.
If you’re getting a loan from a mortgage lender you will probably be required to prepay for an insurance premium. When you pay that is up to you, whether you pay it in full up-front or allot it to your closing cost payment plan. Your lender could require you to set up an escrow account to pay back the mortgage, premium, and any taxes on the property.
