All homeowners insurance policies are going to cost money. And, to keep the policy active, you will have to pay your premium both on-time and in-full. However, making an in-full payment might mean making a lump-sum payment for your home’s entire annual cost. Or, it might mean making a monthly payment, which helps you pay off the annual premium cost over time. While you might think you have a choice in whether to pay a lump sum or an installment plan, you might find that restrictions exist. Sometimes, mortgage lenders institute requirements for their buyers to pay in certain ways. Here’s a little more of an explanation.
The Requirement to Get Homeowners Insurance
Buying a home often means taking out a mortgage or otherwise financing the home. Therefore, even though the home is yours, your bank still maintains an interest in it. They also have a degree of ownership on the property, which means that if you fail to pay your mortgage, you could lose the home. Until you pay off the home, you might face quite a few regulations imposed by your mortgage lender.
One of these requirements might be for you to buy homeowners insurance. Lenders of various sizes, particularly those supported by federal programs, often require their buyers to get homeowners insurance. The reason for this is simple: the lender has a stake in the home. They therefore want you to carry protection in order to protect their investment.
You are supposed to pay back your loan on the home. Therefore, if something happens on the property then various challenges could arise. First, a damaging accident could deplete the home’s value. Also, if you face undue financial challenges from the damage, then your ability to pay back the loan might suffer.
Therefore, the lender could stand to lose out on their investment. The requirement for you to get homeowners insurance might exist because it will help the lender protect themselves from a financial loss. Policies will usually need to include at least a structure insurance element. A structure policy helps you make repairs to the dwelling itself following damage.
Why Payment Requirements Exist
Your lender might not only require you to buy a homeowners insurance policy. They might also require you to pay for it in a certain way.
- Some lenders will require you to pay the entire premium for the first year of ownership at the time you close on the home. Therefore, you’ll have a guarantee of continuous coverage throughout your first year of residency in the home.
- After your first year of ownership, you might be able to elect to start paying your premium in monthly installments. You’ll therefore pay a portion of your entire premium each month. While you will have to make regular payments, these are often smaller payments than paying the premium in-full. However, the drawback to this choice is that you will have to remember to make the regular payment.
- Lenders sometimes do not allow their homeowners to pay homeowners insurance in monthly installments. Sometimes, you will have to pay the premium in-full each year.
- In some cases, you must pay for your premium (and sometimes your mortgage and property taxes) through an escrow account. With an escrow account, you make one payment for your mortgage each month. However, a portion of that goes into an escrow account, which will then pay your homeowners insurance premium when it next comes due.
Many lenders requirements exist because they help you make sure you always keep your homeowners insurance active. If you fail to do so, after all, you could lose coverage. That could leave your home exposed to significant property loss risks, which neither you nor your lender want to have to face. Don’t hesitate to talk to them about any coverage requirements.