When you buy a home with a mortgage, you have several factors that go into that payment. You’ll obviously pay the principal and interest on the loan. But, you may also see charges for real estate taxes and homeowner’s insurance. Many loan programs require that you set up an escrow to pay for these charges.
Hazard insurance is important because it protects not only your interest in the property, but also your lender’s interest. Without insurance and in the face of a disaster, you could end up homeless and the lender could face a large loss without your mortgage payments.
What Does Hazard Insurance Do?
Hazard insurance protects you in the face of disaster. The most common perils it covers include fire, smoke, vandalism, theft, and storm damage. These are the basic perils covered. If you live in an area that is high risk for something like earthquakes or floods, you may need additional insurance.
At a minimum, though, hazard insurance covers you in the event that you have damage or a total loss of your home. If that occurs, the insurance company will help you pay to rebuild your home. This means the lender would still have collateral for your loan.
Hazard insurance does not cover things like liability (someone else gets hurt on your property) or loss of personal belongings worth more than the standard coverage amount. Your lender will focus on the hazard insurance that will protect their interests. As long as you have enough hazard insurance to cover the loan amount, the lender won’t push you to secure more insurance, but you may want to consider it.
Mortgage Lenders Require Hazard Insurance
It’s important to understand that mortgage lenders require hazard insurance. In other words, you can’t close on your loan unless you prove that you have it. You should provide a paid receipt for the first 12 months of the policy.
Don’t think you can let the insurance go after the first 12 months, though. Your lender will know if you cancel your insurance. If that is the case, they will give you a certain amount of time to put another policy in place. If you don’t, the mortgage company can force-place insurance on you.
If the lender has to go this route, it’s going to be very expensive on your end. The lender purchases the policy for you and then charges you the premium for it. The coverage force-placed on your home will typically be bare bones coverage that will only protect the lender’s interest in the home too. There aren’t any regulations regarding the cost of this insurance, but typically, you can expect it to be much higher than the premiums you could have obtained yourself.
Choosing the right hazard or homeowner’s insurance is an important step when buying and/or owning a home. You want a policy that protects your interests in the home as well as the lender’s interest. If you don’t have proper insurance and something occurs to your home, you are still liable for the mortgage, not to mention you are without a home. Making sure you have adequate homeowner’s insurance will help protect you and your investment in your home in the end.Click to See the Latest Mortgage Rates»