Understanding Insurance Requirements For Your Mortgage
If you buy a home with a mortgage, there is a good chance that the mortgage company will require that you get homeowners insurance. Because buying a home is the largest purchase most people will ever make in their lifetimes, it is probably a good idea to get insurance whether the mortgage company requires it or not.
But why is insurance required, and what kinds of insurance policies are there? Understanding some basics about homeowners insurance can help you with your new home purchase.
The Bank Wants Security
Your home is the property that secures your mortgage. So, if you do not pay the money you borrowed, the bank can foreclose, take back the home, and sell it. That means that as long as you owe money to the bank, it has an interest in making sure that the home is maintained, protected, and repaired if damaged.
That’s why the mortgage company requires you to get homeowner’s insurance. They are trying to protect the property they will need to take back from you, if you do not pay.
What Kind of Insurance?
But often, mortgage companies or lenders won’t allow you to just take out any kind of insurance policy. They will want you to take out a specific kind of insurance policy, often, what is known as a replacement value policy.
Unfortunately, many people try to get what is known as an actual cash value insurance policy. This insurance policy will just evaluate the value of the part of your home that was lost or destroyed, and pay you the value of the part of your home that was damaged. So, if your 10-year old roof is damaged, you would get paid the actual value of a 10 year old roof.
The problem is you can’t replace your 10-year old roof with another 10-year old roof. You need a new one, which is more expensive than your old, damaged 10-year old roof. So, you are effectively uninsured or underinsured, and you may not be able to actually replace the roof on your home.
That means that actual cash value policies are often insufficient, and many mortgage companies won’t allow you to get them to protect or insure your home. In fact, some mortgage companies may find you to be in breach of your mortgage for getting these policies and may actually impose forced placed insurance on you for having this policy, or worse, could even foreclose on you for being in breach of your mortgage agreement.
Another consideration is flood insurance. Contrary to popular belief, most homeowners insurance policies do not insure you for flooding, which is a major concern given Florida’s propensity for hurricanes. The requirement for flood insurance may vary based on whether you are in a flood zone or not, but if you are, you can expect to have to purchase an additional flood policy, on top of your existing homeowner insurance policy.
Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today to answer your questions about buying or selling your home, or about your real estate closing.