Insurance Q&A: “Why is insurance required for a house?”
The good news is that insurance is not actually required for a home you own. I guess this is where we define that thin line between “owning” a home and living in a home a bank owns while you make payments for 30 years.
When you take out a mortgage, of course, you don’t actually own that home until the loan is paid off. It’s the bank’s house. And they want it insured to protect their interest.
Yes, You’re Paying to Insure THEIR Home
Doesn’t seem fair, does it? Well, try to keep the fact that you were lent a couple hundred thousand dollars in mind when you think of it this way.
Would you rather pay for insurance, or save up for 30 years and buy a house in cash at age 60? Because that’s where we’d be without the lenders.
Let’s face it. There are people out there (not you, we’re sure) who would simply stop paying their mortgage after a large, uninsured loss on their home? Not sure? Try to think of it in terms similar to the U.S. housing crisis.
Thousands of Americans are walking away from their mortgages simply due to a decline in value. It is likely these same people would tell the bank to “take a hike” if the house burnt down and there was no insurance to rebuild it.
And…You’re Paying to Insure THEIR Loan
We’re talking about private mortgage insurance. If you borrowed more than 80% of the value of your home in one mortgage (versus opting for two mortgages or putting more money down), you are likely paying for that too.
Private mortgage insurance is designed to reimburse the lender if you default on your payments. So, ultimately you are buying an insurance policy that covers the bank’s butt in the event you stop paying.
Again, don’t forget that you might not have ever owned a home if a mortgage was not available. That always helps relax us.
What If I Don’t Insure?
Again, the consequences differ based on whether or not you own your home outright or have a mortgage.
If you own your home free and clear and do not insure, the consequences of a loss are quite obvious. You simply pull out your checkbook and start to rebuild/repurchase everything you lost.
This is why insurance is still the best way to protect your assets…even if you own outright.
On the other hand, you will not get away without insurance if you have a mortgage on your home. First, you cannot get a loan approved without evidence you have purchased homeowners insurance. And in many cases now, you must show evidence that one entire year of insurance is paid upfront.
Once your loan is funded, the lender will be notified if your homeowners insurance policy cancels. If the lender gets a note from your insurer that says you aren’t covered, you will be subject to lender-forced insurance coverage.
Lender-forced property insurance is easily twice as expensive as a regular policy and doesn’t cover you the same way.
Your personal property…not covered. Your personal liability…not covered. Why not? Because your lender could care less if you are personally sued or everything you own is destroyed in a fire. They are only concerned about insuring the physical structure THEY own.
Read more: Switching homeowners insurance companies.