|
Most financial institutions that offer
mortgages require insurance coverage in the loan contract to
protect their interest in the property. The lender becomes a
co-payee (with you), in case of loss, and will remain one as
long as it has a vested interest in your home. It may
require your insurer's financial stability to be rated above
a specific level by one of the many rating services (see
How to Select an Insurance
Company)
This means your insurance company will
generally make any checks for home-repair claims payable to
you (the insured) and your financial institution. The lender
gets equal rights to the insurance check to ensure that you
make any necessary repairs. For this reason, an official at
the financial institution will also need to endorse the
check. The lender will inform you of its stipulations.
To protect its financial interests, the
lender will generally place the money in an escrow account.
(This means a third party holds the money until certain
requirements are met.)
During the process, the lender will pay
for repairs as you complete the work. Show the lender your
contractor's bid and how much it will cost to start the job.
Make sure you ask for and save receipts.
When repairs are completed, financial
institutions can't keep remaining settlement proceeds to
cover the balance of your loan. Any funds that exceed the
mortgage's balance should be released to you.
You may also receive a separate check
from your insurance company for your home's contents and
other expenses. If you don't, the lender should send you the
insurance payments that don't relate to the dwelling.
If you feel your financial institution is
withholding funds that are rightfully yours, call the DFS
Consumer Helpline at 1-800-342-2762.
Force-Placed Homeowners Insurance
If you fail to obtain homeowners
insurance, your lending institution may buy it for you,
since loan contracts usually require it. Warning: The
premium for this coverage is very costly. Such a policy will
usually only cover the structure and not your personal
property, or the policy may only cover the loan's
outstanding balance.
What About Private Mortgage
Insurance?
Most homeowners know this type of
coverage by its initials: PMI. This insurance helps protect
lending institutions from default by borrowers. You may need
this type of insurance if you pay for a mortgage on a
high-ratio loan. This is when your mortgage down payment is
less than 20 percent of your property's value. This
insurance allows you to qualify for a larger mortgage than
is otherwise available with a small down payment.
Once you obtain more than 20-percent
equity in the home, you can cancel this insurance. A 1999
law requires lenders to provide notice of your PMI
cancellation right.
Mortgage Life Insurance
This insurance pays off your home in the
event of your death. The cost depends upon the mortgage
amount, payoff time and a special calculation table. The
loan principle and mortgage interest decrease with each
monthly payment. Your mortgage-insurance amount may exceed
your mortgage amount.
You may obtain this coverage for both
spouses under one contract on a first-to-die basis. This
means that the surviving spouse becomes the beneficiary.
Mortgage life insurance may prove
economical for its specific purpose, but you may need a good
health record to buy a policy. As with all policies, it is a
good idea to do research in order to choose the mortgage
life insurance policy that is right for you.
What About Building a New Home?
It pays to know about builders' risk
coverage if you plan to build your own home or hire a
contractor to build one for you.
A typical policy is in effect from the
beginning of construction, remodeling or alteration to the
completion of the project. Insurance companies offer
coverage for items such as a home under construction, lumber
and other materials, machinery, equipment, permanent
fixtures, debris removal, pollutant cleanup, plans,
blueprints, valuable records or papers, landscaping, and so
on. This coverage can help ensure that you or your
contractor can obtain funds to repair or rebuild in case of
loss. In addition, the insurance company may assume risk for
certain legal actions taken due to the negligence of anyone
connected with the construction. This may require a special
endorsement to your policy.
Before you begin any home-construction
project, find out whether you or your contractor need this
type of coverage. Potential homeowners often require
contractors to obtain such coverage as part of construction
contracts. Also, you may be able to buy a permanent
homeowners policy that covers the building while it's in the
construction phase.
Before you obtain a policy, find out if
it includes any exclusions for faulty or improper
workmanship, or other factors that could increase your
construction costs or risks.
Some insurance companies will add
builders' risk coverage to a policy for an additional
premium - with no need for a separate policy. Contact your
insurance agent or company for more information.
|
