Is Homeowners Insurance Required?
Homeowners insurance provides a way to protect your home and belongings without exorbitant out-of-pocket costs. While no state or government entity requires homeowners to buy home insurance, most mortgage lenders do, in order to protect their investments. Whether a wildfire roars through your home, a windstorm whips the roof off of your garage, or a burglar ransacks your den, homeowners insurance policies cover a wide range of disasters, accidents and perils. Without homeowners insurance, you'd have to pay to repair damages and replace losses on your own. However, purchasing a policy at a monthly expense can dramatically reduce your expenses in the long run.
Is Homeowners Insurance Required by Law?
There is no federal or state law that requires homeowners to purchase homeowners insurance. There are plenty of reasons to buy a policy, however, even if you've already paid off your mortgage. You could save thousands of dollars if a fire or storm damages your home or if you are burglarized and lose many of your prized possessions.
Is Homeowners Insurance Required by Mortgage Lenders?
If you're still paying off a mortgage, your mortgage lender will most likely require that you buy a homeowners insurance policy, possibly even a flood policy, depending on your home's risk factors. If you do not buy a home insurance policy, your lender can legally buy one on your behalf. In fact, if you have a mortgage and are unsure if you have a home insurance policy, chances are that the cost is bundled into your mortgage payment. In this instance, you may be paying too much for coverage or you may be underinsured for your personal property. It's always a good idea to compare prices in your area. You can switch homeowners carriers without your lender's approval, but it's a good idea to let them know before you change providers.
When Is Homeowners Insurance Coverage Required?
According to Experian, around 44% of U.S. consumers have an active mortgage. To be approved for those mortgages, each consumer likely had to purchase coverage because most lenders enforce having a policy as a requirement before they lend any money.
Even after you finish paying off your mortgage, you'll likely want to continue paying for a policy. However, it's your choice at that point.
Is Homeowners Hazard Insurance Required on all Mortgage Loans?
Hazard insurance is an important part of your homeowners insurance policy. So, what does hazard insurance cover? Hazard insurance protects your property from natural disasters, including a fire, a hail storm, a windstorm, and other natural events depending on your location. If you own a home damaged during one of these covered events, you will receive compensation for the repairs. In other words a homeowner insurance policy provides you financial protection if something happens to your home.
Since a homeowners insurance policy protects the value of the home, most mortgage lenders will require you to buy a hazard insurance policy. They also usually set a minimum amount of hazard coverage necessary to borrow from them. Each mortgage lender will vary, though.
How Much Homeowners Insurance Is Required for a Mortgage?
Every homeowners insurance policy includes a coverage limit. The amount your mortgage lender requires you to buy will depend on them and the value and risks of your home. Many ask that you purchase a minimum of 80% of the replacement cost. However, other mortgage lenders require you to purchase enough insurance to cover 100% of the home's replacement cost so that you can rebuild from scratch if a disaster strikes.
Why You Should Consider Homeowners Insurance Even if Your Home Is Paid Off
Homeowners insurance has its uses. In particular, it protects your personal belongings and the structure of your home if it's damaged during a covered event. It does this in a variety of ways. Namely, it provides funds to pay for repairs or replacements of the affected structure or belongings. Otherwise, you may have to spend thousands of dollars out of pocket.
Think of it like this: there are several ways you take care of your home. Many of them are preventative, like installing rain gutters, re-caulking showers, and regular maintenance. By keeping an eye on things, you minimize any possible damage. Likewise, a homeowners policy is a regular payment that helps you prevent financial loss in case of an expensive disaster you may otherwise not be able to afford.
In addition, liability coverage ensures you have funds for a lawsuit or settlement if you're at fault for another's property damage or their injury while on your property. Without insurance, you would pay any legal or medical fees straight from your wallet, which can be costly.
What Happens if You Don't Have Homeowners Insurance?
If you don't have the protection of a homeowners insurance policy, you may face the risk of paying for every scratch, break and disappearance out of your own pocket. It can be overwhelming enough when an appliance stops working in your home, so imagine how the cost to repair a whole section of siding, home system, or even the house itself would impact you.
The Dangers of Losing Homeowners Insurance
It's also possible for you to lose your homeowners insurance. Your policy may lapse after several missed payments, or you may be unable to renew your policy for filing too many claims. The insurance company will send both you and your lender a 30-day notice, which gives you time to purchase different coverage or reinstate your current policy. If this happens, it's best to buy a new policy before the lender forces one on you.
Always keep in mind that your lender wants to maintain the value of your home. A Homeowners insurance policy helps do just that. If you lose your insurance, your lender may purchase force-placed insurance and require you to pay for it. Many homeowners might want to avoid this, as it's usually more expensive than a policy they could purchase on their own. It also doesn't include liability or personal property coverage.
Do You Need Homeowners Insurance If Your Home is Paid Off?
No one can force you to purchase homeowners insurance after you pay off your mortgage. But think about all the money you've put into your home. For many of us, our home has sentimental as well as financial value. It may even be our greatest investment.
So, opting out of homeowners insurance has two consequences: endangering what is probably your most valuable asset. Of course, you can always ask for a quote if you want to change your policy to suit your new needs.
Required or Not, Protect Yourself with Homeowners Insurance
A homeowners insurance policy may be another cost on your plate, but it may save you money in repair costs in the long run. Designed to shoulder heavy expenses, homeowners is required with a mortgage and is also an important coverage to have even if your house is paid off. Without a policy, you leave your house and finances vulnerable.
Finding the right policy for your needs can be confusing. SmartFinancial compares over 200 insurance companies to find the level of coverage you need at the most affordable price. Get your free quote for homeowners insurance by entering your zip code below and answering a few questions.