The Very Good Reason Your Lender Requires Homeowners Insurance For Your House

February 18, 2020 by Dan Green

Homeowners insurance is so important to your lender that if you don’t buy it, your lender will buy it for you, then send you the bill — however much that costs.

Why? Because your mortgage is a loan, and the collateral is your house. That gives your lender a financial stake in your house; which gives your lender the right to request certain things.

Homeowners insurance is one of those things.

Homeowners insurance is an insurance policy that pays out cash when your home’s been damaged or destroyed.

When you buy your house, your lender will require a homeowners insurance policy that’s equal the size of your home loan, at least, so your loan can be repaid if your home’s been destroyed; or, so that repairs to the loan’s collateral can be made.

As a homeowner, though, you might want additional coverage beyond what’s required.

Home buyers commonly exceed their lenders’ minimum coverage standards and go for replacement cost coverage instead.

Replacement cost coverage pays out the full cost to rebuild your home as-is after its complete destruction by a disaster. This is especially important for home buyers who make a down payment for whom minimum coverage amounts won’t cut it.

More coverage means higher annual costs, though, so consider the following ideas to lower what you pay for insurance:

  • Live nearer to a fire station or police station
  • Install a home security system, and water or fire sensors
  • Choose a larger deductible for your policy

Homeowners insurance is great for small repairs, but its real value is the protection it provides after major disasters.

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