As you might know, if you have a mortgage (or two) on your home, you are not the sole owner of your house. Your mortgage lender has an interest in your home and, as a result, will also have an interest in your home insurance policy. In fact, your mortgage terms may obligate you to provide certain benefits within your insurance policy to the lender. It’s important to review your mortgage terms when purchasing your home insurance policy to make sure that you are in compliance.
Your interest in your home is shared with your mortgage lender. For example, if your house is worth $200,000 but you have a $100,000 mortgage on it, the mortgage must first be satisfied before you are able to take advantage of the remaining value, also known as the equity. Your mortgage lender treats your house as collateral in that they secure their loan to you with an interest in the home itself. If you neglect to pay your mortgage on time, the lender can foreclose on the home and try to sell it to pay off the amount you owe. As a result of this arrangement, the mortgage lender has a keen interest in protecting its asset by requiring you to maintain proper home insurance.
You might wonder how the mortgage lender uses your insurance policy to satisfy its requirements. First, they require you to provide them with evidence of your policy each year when it is renewed. This can be done either through a certificate of insurance or an actual copy of the policy. Your loan documents should specify how you need to provide evidence of the coverage and what remedies the lender has if you fail to do so. One of the worst things that can happen is if you are subject to force-placed insurance, which is when your lender purchases coverage on your behalf and charges you for it. This coverage is generally much more expensive than any coverage you could buy on your own.
Within the home insurance policy, the lender’s interest is protected through a fairly standard provision known as a “mortgage clause,” which specifies how proceeds from a claim are distributed. For example, if there is a large damage claim to your home, the insurance company through its mortgage clause is obligated to issue payment to both you and the mortgage lender. You will then need to arrange with the lender how the funds can be disbursed to rebuild or repair your home. This process ensures the lender will not be left with a damaged home if you decide to take the insurance proceeds and not repair the house.
Another way of protecting its interests is requiring you to impound your insurance premium payment. This means you pay your insurance premiums each month along with your mortgage payment. The mortgage lender then takes the funds and pays your insurance company when the premiums are due. This way, the lender does not allow you to fall behind on insurance premium payments. Impounds are also common for property taxes.
As you can see, your mortgage lender has several ways to insure their interest in your home no matter where you live: Atlanta, Detroit, Kansas City, Omaha, San Diego. By following the rules, these requirements should pose no additional hardship to you and will allow you to protect your mutual asset: your home.