Homeowners insurance
A policy covering damage to your home and belongings, required by lenders and usually collected monthly into escrow as part of your payment.
What does homeowners insurance mean?
Lenders require homeowners insurance to protect the collateral behind the loan — the house itself — against fire, storms, theft and liability. Like property tax, the annual premium is typically split into your monthly payment and held in escrow, then paid when due. In high-risk areas the cost can be substantial, so factor it into the full PITI, not just principal and interest, when judging what you can afford.
What a standard policy covers
Most homeowners buy an HO-3 policy, which bundles several separate coverages under one premium. Knowing the parts helps you read a quote — and spot where the gaps are.
- Dwelling — repairs or rebuilds the house itself and attached structures. This is the figure your lender cares about.
- Other structures — detached garages, sheds and fences, usually set at about 10% of the dwelling limit.
- Personal property — furniture, clothing and electronics, often 50–70% of the dwelling limit.
- Loss of use — hotel and extra living costs while the home is being repaired after a covered loss.
- Personal liability and medical payments — legal costs and injuries to guests on your property.
Why your lender requires it — and what it does not cover
Your home is the collateral for the mortgage, so the lender requires dwelling coverage for as long as the loan exists and is listed on the policy as the mortgagee. If coverage lapses, the servicer can buy force-placed insurance for you — which usually costs far more and protects only the lender.
Standard policies exclude floods and earthquakes. If the home sits in a FEMA special flood hazard area, a separately purchased flood policy is mandatory for a federally backed loan. Premiums are commonly paid monthly through escrow, so the insurance cost is part of your PITI payment, not a once-a-year bill.
Frequently asked
Is homeowners insurance required for a mortgage?
Yes — lenders require it to protect the home securing the loan, and it is typically collected into escrow and paid with your monthly payment. Once the mortgage is paid off it is no longer required, though staying insured is strongly advised.
How much is homeowners insurance on a $400,000 house?
It depends far more on location and rebuild cost than on the price. Insurers price the cost to rebuild the house, plus your state, roof age, deductible and claims history, so two $400,000 homes can differ by thousands of dollars a year — coastal and wildfire-prone areas cost the most. Get at least three quotes based on replacement cost before you budget.
What is the most important coverage in homeowners insurance?
Dwelling coverage — it pays to repair or rebuild the house itself and is the part your lender requires. Set it at the full replacement cost, not the market value or loan balance.
Liability coverage is the next priority, since a single injury claim on your property can exceed what you could pay out of pocket.
Is homeowners insurance the same as mortgage insurance?
No. Homeowners insurance protects you and the lender against damage to the home and liability claims.
Mortgage insurance — PMI on conventional loans or MIP on FHA loans — protects only the lender if you stop paying, and is charged when your down payment is small.
Related terms
All glossary terms