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There are certain boxes you need to check off before finalizing a mortgage on a home. For one thing, your home needs to undergo an appraisal to make sure it’s worth an amount that satisfies your lender. You also need to show proof of a homeowners insurance policy before your mortgage can be finalized.
Why do mortgage lenders insist on homeowners insurance? It’s simple. Let’s say you were to stop paying your mortgage. Eventually, your lender would be allowed to force the sale of your home via a process called foreclosure to get repaid.
But what if your home were no longer standing following a catastrophic event? If you don’t have a livable home, your mortgage lender can’t recoup its money in the event of you defaulting on your loan.
That’s why lenders insist on homeowners insurance. If you have a policy in place, it will generally cover the cost of repairing or rebuilding your home so your lender is left with an asset of value.
Now, you may be wondering whether you’re allowed to drop your homeowners insurance coverage once your mortgage is finalized. But as long as you have a mortgage you’re paying off, you’re required to have homeowners insurance. And if you let your coverage lapse, your lender isn’t going to be happy about it.
You need ongoing protection
As a property owner, it’s extremely risky to go without homeowners insurance. If major damage were to occur to your home, you could end up in a financially devastating situation in the absence of having homeowners coverage. So even if you’re in a position to purchase a home in cash, it still pays to put homeowners insurance in place.
From a mortgage lender’s perspective, until you own that home free and clear, you’re required to keep an active homeowners insurance policy in place. And if you let your homeowners insurance lapse, you can expect your mortgage lender to not only find out about it, but do something about it.
In a nutshell, if you give up your homeowners insurance policy or lose it by failing to pay, your lender is allowed to buy a replacement policy for you — and charge you for it. So either way, as long as you’re carrying a mortgage, you’re going to have to pay for homeowners insurance in some shape or form.
You can always shop around for a better rate
If you’re looking to dump your homeowners insurance because the cost keeps going up, know that you’re not stuck. There’s no rule stating you have to stick with the same homeowners insurance company for the duration of your mortgage. You can switch insurers at any time if there’s a better deal to be had.
What’s more, if you own a vehicle, there could be savings involved if you bundle your homeowners and auto insurance policies. So that’s another avenue to explore if you’re not currently using the same company for both policies.
Going without homeowners insurance is a seriously risky move. But even if it’s a risk you’re willing to take, it’s not going to fly with your mortgage lender. You’re better off taking an active role in putting insurance in place or keeping your existing policy intact. Otherwise, your lender could stick you with an even more expensive bill.
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