The vast majority of home buyers usually use some type of mortgage loan to pay for their home. If you have been through it, then you must be knowing how much paperwork and fine print is truly involved. While you can’t be expected to remember every term of your mortgage, it is important to be conscious of certain key provisions. A usual mortgage contract defines exactly what type of homeowner’s insurance you need and how much of it you are required to bear. For example, you may need coverage protecting your home from robberies, fires and other damages.
Generally, you need enough coverage so that your insurer would issue a claim allowing complete payment of your home mortgage in an event of any disaster. You may also be required to carry special insurance policies, such as wind insurance or flood insurance, depending on where your home is located.
If you fail to maintain the required amounts of insurance coverage, then your mortgage contract may give your lender the right to purchase the insurance you are missing. Typically, this is referred to as “force-placed insurance” – and it can be very expensive.
The significant cost of “forced placed insurance” is, when you lack the insurance required by your mortgage terms (or if your coverage lapses), your mortgage lender can buy whatever type of insurance it chooses per the rules regarding “force-placed insurance”. In these cases, your lender is not going to shop around to get the best deals for you – instead, the policy will be significantly more expensive than what an equivalent policy would cost on the marketplace. In fact, force-placed insurance policies could have premiums up to 10 times greater than normal insurance rates.
Oftentimes, force-placed insurance is expensive because lenders make a profit on the policies they purchase. For example, Bank of America purchases force-placed insurance for their mortgage borrowers through its own subsidiary. Another major bank, JP Morgan, purchases force-placed insurance through Assurant, which then pays a subsidiary of JP Morgan to re-insure the policies it provides. Because of such practices among major banks, premiums for force-placed insurance generates billions of dollars.
The significant risks of forced placed insurance are, when lenders purchase force-placed insurance, the costs of the often exorbitant premiums are typically tacked onto your monthly mortgage payments. This presents a number of risks. One issue is that you may fall behind on your loan payments. And when you fall behind your loan payments, you may be charged late fees and penalties – making it even more difficult to pay the bill and to get caught up.
Another major problem, is that force-placed insurance is often purchased when a homeowner is already struggling to pay all of his or her bills. During times of financial trouble, you may let your insurance policies lapse – and thus trigger the force-placed insurance. If this occurs, you will then be thrust into an even worse financial situation, since your insurance will suddenly become much more expensive – and could force you into foreclosure.
One should avoid force-placed insurance. The best way to avoid force-placed insurance is simply to do everything possible to avoid a lapse in your required insurance coverage. This means, reading your mortgage contract carefully to determine the types of insurance you need and making sure that you always have insurance that meets or exceeds the minimum requirements.
You must Check your mortgage statement each month for unexpected charges. If force-placed insurance has been purchased on your behalf, you need to contact your lender to find out what insurance you are missing so you can promptly buy your own policy to meet coverage requirements. United Financial Counselors can assist you with setting up an appointment with a reputable insurance agent who can help you find the best price available for all of your insurance needs.