Do You Have The Right Insurance For Your Mortgage?

If you are buying a home, and you are getting a loan and a mortgage on your property, you probably already know that the lender will require that you take out insurance on the property. In an age when property insurance rates are spiking, it may be tempting to find the cheapest policy that you can find. But what you may not be aware of is that finding such a policy can end up putting you into foreclosure on your home.

Two Kinds of Insurances

Lenders tell you that they require that you take out an insurance policy. But what they often don’t specify (or what many people don’t know offhand) is what kind of insurance the lender requires.

If you have damage to your property, there are really two kinds of insurance policies. The first kind is a replacement value policy. This is the kind of insurance that most lenders will want you to have, because it provides the most protection.

Let’s say your 10-year-old roof gets damaged in a storm, and the damage is insured. What does the insurance company owe you? The value of the 10-year-old roof that you just lost, or the value of a new, replacement roof?

With a replacement policy, the insurance company replaces what you lost, even if the replacement cost has a higher value than the property that was just damaged (as it almost always will). So, in our example, the insurance company would pay to put on a brand new roof.

Actual Cash Value Policies

There are also policies out there called actual cash value policies. These only pay the actual value of what was damaged.

In our example, insurance would pay you the value of your now-destroyed 10-year-old roof. The problem is that the value of your 10-year-old roof isn’t close to what a new roof costs. The end result is that although insurance has paid under the terms of the policy, what was paid still doesn’t cover the full value of a brand new, replacement roof.

Lenders Won’t Accept Actual Cash Value

Many lenders are refusing to accept actual cash value policies. In fact, if you do get one, aside from the other reasons why it’s a bad idea, some lenders will consider you uninsured, and thus, in violation of the mortgage, which could lead to a foreclosure if you don’t get a policy that the lender wants.

The lender also may consider you to be uninsured, and may place on you the lender’s own insurance, called forced placed insurance, which is significantly higher than the insurance that you could have gotten on your own.

Problems at a real estate closing can become bigger problems later on if you’re not careful, and if you don’t have good legal advice. Let us help you with your real estate closing.  Contact the Tampa real estate lawyers at the Gilbert Garcia Group, P.A.for help.

Sources:

dfs.ny.gov/consumers/help_for_homeowners/insurance/force-placed_insurance#:~:text=Force%2Dplaced%20insurance%2C%20also%20known,does%20not%20secure%20a%20replacement

amfam.com/resources/articles/understanding-insurance/replacement-cost-vs-actual-cash-value#:~:text=After%20a%20loss%2C%20actual%20cash,as%20age%2C%20condition%20and%20obsolescence.