Why mortgage lenders require you to purchase insurance
Why mortgage lenders require you to purchase insurance
Most Americans dream of the day they will purchase their first home, and many prudent individuals begin saving for this goal as soon as they begin their working years in their 20s. This is a great goal to have, and many people will be able to achieve it if they are patient and work hard enough. However, before you make the final decision to purchase a home you need to be aware of all the different expenses and obligations you will have once you become a homeowner.
Obviously, your most significant financial obligation when you purchase a home will be your monthly mortgage payment. However, there are numerous other costs you need to keep in mind including property taxes, closing costs (such as real estate commissions and inspection fees), and homeowners insurance.
Homeowners insurance is usually required by the mortgage lender before you receive your loan. It's pretty easy to understand why since most people only put up about 20% or less for a down payment. The lender is taking a risk by providing the rest of the funds which you will then pay off on a monthly basis (usually for 15 or 30 years). If the worst happens and your house burns down within the first few weeks, your lender would have lost more than you (at least financially)!
By the way, if you wish to put down less than 20% of the purchase price, the lender may require you to purchase private mortgage insurance (assuming you're approved to begin with). This is simply to protect the lender in the event that you are unable to pay and wish to walk away from your home (like many homeowners did during the real estate crisis of the late 2000s).
But let's get back to the homeowners insurance for the moment. This insurance not only protects your real estate property (which is obviously the most costly), but also protects your personal property which may be stolen or damaged. It even protects you against some kinds of lawsuits, such as when a visitor is injured on your property and tries to sue you for damages.
Most people are aware that insurance is a requirement when they purchase a home, but it is important to keep this factor in mind when analyzing the total cost of homeownership. When you add those regular fees to your mortgage payment, property taxes, and maintenance fees, the cost of owning a home may be higher than you think.
It may be a good idea to ask your neighbors and friends what kind of rates they are paying for their insurance, but keep in mind that some homeowners are paying too much or have inadequate protection. Be sure to keep your particular needs in mind when making your decision.
http://www.articlesbase.com/real-estate-articles/why-mortgage-lenders-require-you-to-purchase-insurance-2686118.html
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