Insurance Q&A: “Do I have to buy my lender’s insurance?”
Welcome to the wonderful world of homeownership…and all the frustrating, unexpected costs that come along with it.
While there are many expenses you’ve likely overlooked, let’s focus on the insurance portion.
So, you’re getting close to sealing the deal and your homebuilder says it’s time to get your home insurance lined up.
This might throw you for a loop if you’ve never owned a piece of property.
But fret not; the good news is they have an insurance company who will “take care of you.” At this point, you may get an emailed quote from your lender’s “exclusive” homeowners insurance company.
Don’t let the “exclusivity” of their relationship fool you. You do not have to purchase insurance from your lender/builder’s insurance partner…regardless of how official and tantalizing their offer sounds.
This doesn’t mean you shouldn’t buy insurance from their “partner,” it’s just that TTAI always recommends getting multiple insurance quotes to ensure you get the best deal. After all, they’re free, so why not shop around?
Why Go with the Lender’s Insurance?
While this may come as a surprise to you, insurance companies and lenders have partnered up to try to get a little more of your money. Of course, this may benefit you and it may not.
One benefit of going with your lender’s insurance partner is that they may give you an interest rate discount on your home loan. If the coverage is good and you can save .125% on a 30-year mortgage…GO FOR IT!
Regardless of the cost of the policy, you’ll save thousands of dollars in interest on the loan by taking the lower mortgage rate. The policy would have to be an astronomical amount to not make sense in this situation.
Conversely, the insurance policy they offer you may be just be flat out expensive, with no related loan incentive. This is why you need to shop around.
Note: You do not have to keep the same insurance company when your policy renews to enjoy the lower interest rate on the loan. Your lender cannot go back and change the terms of your mortgage after it is funded.
If the coverage on the policy you’re offered isn’t any good, you may risk losing thousands of dollars on an uninsured claim. This is why you will want to consult at least one other insurance agency to compare and contrast the coverage you are being offered.
One final note. Don’t confuse a lender’s preferred insurance provider with lender forced insurance coverage, which is a completely different kettle of fish.
Read more: Home insurance vs. home warranty.