Are you thinking about buying a house? Did you know that many lenders may refuse to grant you a mortgage if you don't have home insurance already lined up? While there is no legal requirement for homeowners to have insurance, lenders may still have their own rules. If you're thinking about getting insurance now and then dropping it or letting it lapse in a few months or a year, here are some reasons why you shouldn't do that:
Insurance will be added to your mortgage payment: Many insurance companies will immediately notify your mortgage company if you stop paying or don't renew your premium. If you don't already have other home insurance lined up, your mortgage company will pick their own insurance company and add the payment to your monthly mortgage bill. This is called forced-placed insurance. They do this because, should your house burn down or be damaged by a storm, the lender doesn't want you to simply walk away from the property. Insurance protects both your investment and theirs, in case of an unfortunate incident.
You can shop around: As long as your home insurance is in good standing, you are always free to shop around for a better rate. When it's time to renew your policy, you may find out that a different company actually offers better coverage and has a lower rate. As long as your home is continually covered by at least one insurance company, your lender isn't going to care who the policy is with. But if you're already been subjected to forced-placed insurance, there may be terms in your mortgage contract that don't allow you to switch to a different insurance company. Since you've stopped paying once, the mortgage company may not trust you to keep up payments on your insurance premium.
You can combine discounts: Some home insurance companies offer substantial discounts if you also have other insurance policies with them. For example, a combined home insurance and car insurance policy may be even less than just the home insurance policy on its own. This is because these insurance companies may view people who have multiple insurance policies as being more reliable or trustworthy. As a result, you may be considered to be at a lower risk of filing a claim. In order to reward you for this and to keep you as a customer, the insurance company then gives you a discount. But if the bank has added forced-place insurance to your mortgage, you are unlikely to be able to claim any discount for having multiple policies. Instead of being in your name, the insurance policy may be in the mortgage company's name on your behalf.