Understanding the Link Between Homeowners Insurance & Your Mortgage
Homeowners insurance is often required by mortgage lenders, as it protects the lender’s investment as much as it protects the homeowner and their property from property damage and legal implications. Homeowners insurance covers the cost of repairing or rebuilding your home should an incident occur. Examples of these incidents could be fires, storm damage, burglaries, etc… By having the right level of coverage through your homeowners insurance policy, you’re able to ensure your property retains its value, is protected, and is safe and sound for many years to come with the peace of mind attached to one of your biggest investments.
When homeowners choose to cancel their insurance, it can have a ripple effect on their mortgage, potentially leading to serious financial and legal implications. This post will explore what happens to a mortgage if the homeowners insurance on your home is cancelled, covering the consequences,the lender’s response, and tips for better managing this risk. Should you need to reach us for guidance on this matter, don’t hesitate to contact us.
What Happens if Homeowners Insurance is Cancelled?
Immediate Notification to Your Lender
Your lender will likely receive an immediate notification if your homeowners insurance policy is canceled, as this puts them at risk with their insurable interest in your property. This notification will trigger a series of actions by the lender for protecting their investment.
Lender’s Protective Measures
Forced-Place Insurance: If you fail to properly maintain homeowners insurance, your lender will likely purchase an insurance policy on the home itself to protect their interest. This is commonly referred to as forced-place insurance. Forced-place insurance policies generally come with higher premiums and less coverage than a standard homeowners insurance policy. The cost of this insurance will be added to your mortgage payments automatically, which could increase your monthly expenses significantly.
Breach of Mortgage Agreement: Not maintaining homeowners insurance can be considered a breach of the terms of your mortgage agreement. This breach of terms may lead to penalties, and in worst-case scenarios, it could lead to foreclosure proceedings if it’s determined the breach has significantly increased the lender’s overall risk with their investment in your home.
Financial & Legal Consequences
Increased Financial Burden: Forced-place insurance is typically much more expensive than standard homeowners insurance policies. The increase in pricing is largely due to the insurer taking on a higher level of risk without prior inspection of the property itself. Additionally, it usually provides a lesser level of coverage than standard homeowners insurance.
Legal & Foreclosure Risk: If you’re unable to pay the increased mortgage payment which includes the increased premium with forced-place insurance, you’ll risk falling behind on your mortgage payments. This delinquency could lead to foreclosure proceedings taking place.
Why Homeowners Might Cancel Their Insurance
There are several reasons why a homeowner may cancel their insurance policy:
- Financial difficulties: Unable to afford the premiums
- Switching policies: Cancelling a policy in favor of another with better rates or coverage
- Overlooking renewal: Sometimes cancellations occur because homeowners fail to renew their policies on time
How to Manage & Mitigate the Risks
Communicate with Your Lender: Communication is key within any relationship, yet it’s especially important when it comes to proactively communicating with your lender. If you’re having difficulties making ends meet, your lender may be able to offer payment plan options, financial assistance programs, alternative coverage options, etc…
Shop Around: Prior to cancelling your policy due to high premiums, shop around for further comparison of policy benefits and better rates. Oftentimes, there are more affordable options out there with other insurance companies.
Automate Renewals & Payments: Ensuring your accounts are set to auto-pay can be a great way to avoid missed payments and renewals. With auto-pay set up, you’ll be unlikely to miss payments or renewal notices and be all set as long as your cards and bank accounts are active.
Review Your Mortgage Agreement: Having a full understanding of the specifics of your mortgage terms in relation to your insurance is always beneficial. Having this understanding can help you ensure if any changes occur within your homeowners insurance, it will still comply with the terms of your mortgage’s terms and conditions.
Choose Portsmouth Atlantic Insurance for All of Your Homeowners Insurance Needs
Cancelling your homeowners insurance can have implications for your mortgage. It’s so important to understand the associated risk with cancelling your homeowners insurance and the associated costs with forced-place insurance. Establishing clear, open communication with your lender and exploring all insurance options available to you can help you better manage risks. If you’re currently seeking out different options for your homeowners insurance, you’ll want to contact us. We’ll be happy to help in any way we can. We look forward to hearing from you soon!