Is it better to pay for my own home insurance coverage or pay through my mortgage lender?
UPDATED: Feb 20, 2013
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Asked February 20, 2013
Many lenders will make property taxes and homeowners insurance a mandatory part of the lending agreement. The reasoning is that the value of the home needs to be protected, at least until a certain percentage of the mortgage value has been paid off. So requiring you to carry insurance and pay your taxes effectively protects their own investment. But such a requirement is helpful for the homeowner as well.
If your mortgage does not include property taxes, you'll be faced with a large bill once a year. Property taxes are generally a large sum, when paid annually. They are used to pay for municipal and civil services, including maintaining the infrastructure, police and fire, and maintaining local libraries and other public institutions. Failure to pay property taxes can result in the home being seized and sold at auction, resulting in a direct loss to you in addition being obligated to pay the mortgage off even if you lose the home.
Not all home lenders will insist that you buy homeowners insurance, but some will. What most lenders will require if for you to carry a special type of home insurance called mortgage insurance, specially designed to pay off the loan if you default on it or the home is lost or destroyed. Mortgage insurance does not pay out to the homeowner, but it is also much less expensive.
Homeowners insurance is the best way for you, the property owner, to protect your investment. Without it, you could be left with nothing except a mortgage at the stroke of fate, stripped of everything your family cherishes due to a fire or storm that struck in the night. Most homeowner's policies are the responsibility of the homeowner and not connected to the mortgage, but having all of your home related bills wrapped into a single monthly payment can be the easiest way to go.
A majority of new homeowners choose to have their property taxes and home insurance paid from an escrow fund attached to the mortgage. This method avoids surprise bills that have to be paid out of pocket, and could mean the difference between defaulting on the mortgage and remaining financially comfortable. Even if using an escrow that is paid into on a monthly basis is a voluntary decision, it is one that should be given serious consideration.
Answered February 20, 2013 by Anonymous