Is Homeowners Insurance Included in Closing Costs?

Purchasing a home involves numerous financial considerations beyond the sale price. Understanding these additional expenses is important for any prospective homeowner. Many of these costs, grouped as “closing costs,” are due at the close of the real estate transaction. These fees finalize the mortgage and transfer property ownership, representing a significant financial outlay.

What Are Closing Costs

Closing costs are fees and expenses paid by both buyers and sellers at the close of a real estate transaction. These are distinct from the down payment and cover services provided by various parties involved in the home purchase. Buyers typically incur between 2% and 6% of the loan amount in closing costs, though this varies by location and loan type. For example, on a $300,000 home loan, these costs could range from $6,000 to $18,000.

These expenses include loan origination fees, which lenders charge for processing the mortgage, and appraisal fees to determine the home’s market value. Buyers also pay for title insurance, which protects against defects in the property’s title, and government recording fees for documenting the sale. Other costs can include attorney fees, if required, and prepaid property taxes, covering local taxes from the closing date.

Homeowners Insurance at Closing

Homeowners insurance is a requirement for obtaining a mortgage, as lenders protect their financial interest in the property. The first year’s premium is paid at the closing of the home sale. This payment ensures the property is insured from the day the loan begins, providing immediate coverage for potential damages or losses.

While the first year’s premium is paid at closing, homeowners insurance is an ongoing expense rather than a one-time transaction fee like an appraisal or recording fee. It is considered a “prepaid cost” and forms part of the total cash required to close. Lenders require proof of an active homeowners insurance policy, often an insurance binder, before closing can be finalized.

How Homeowners Insurance is Paid at Closing

The first year’s premium for homeowners insurance is prepaid at closing. This premium is often paid directly to the insurance provider, or collected as part of the overall “cash to close” by the lender.

A common practice for managing future homeowners insurance premiums and property taxes is through an escrow account. This account, also known as an impound account, is established by the mortgage lender to hold funds for these ongoing property-related expenses. A portion of the monthly mortgage payment is allocated to this escrow account, allowing the lender to disburse funds for insurance premiums and property taxes when due. These amounts, including the initial premium and any escrow deposits, are itemized on the Closing Disclosure document, which details all final costs and terms of the mortgage loan.