As homeowners continue to struggle with high unemployment and upside down mortgages, many seeking to save money have let their homeowners insurance lapse. If you’re toying with this idea, we urge you to consider other cost-cutting strategies like eating cat food casseroles instead. For starters, if you drop your homeowners coverage, you will be stuck with any repair or replacement costs. More important, your mortgage contract requires that you carry homeowners insurance. What you may not realize is that your lender will be only too happy to buy it for you if you fail to keep up your end of the bargain. This is called force-placed insurance, and trust us, you do not want force-placed homeowners insurance.
Force-placed insurance (sometimes called forced place insurance) is homeowners coverage purchased by your mortgage holder to protect their investment. If you have any doubts about their right to do this, better read your mortgage again.
So what’s so wrong with this picture? Two things: you’re still going to have to pay for the force-placed insurance; and it’s not going to be cheap. Your lender is under no obligation to shop for competitive homeowners insurance quotes. In many instances, the lender will buy the policy through a high-risk insurance carrier where the rates are exponentially more than they would be through a conventional insurance company. That’s because you’re now seen as a bad risk, and in the insurance world, bad risks are charged higher premiums.
It gets worse. If you fail to carry or pay for your required homeowners coverage, even if you’re making your mortgage payments on time, your lender can refuse to accept it or put your payment into a hold account. In the meantime, late fees may be tacked on and you could end up in default of your mortgage.
Your lender can also secure a force-placed policy if you live in a high-risk flood zone (defined by the federal government as any place with a 1% chance of flooding annually) and fail to carry flood insurance. They’re required by law to do so if your mortgage is insured by the federal government (and most are). But they only have to purchase enough flood insurance to cover the outstanding balance on your home loan. So now you’ve got force-placed flood insurance that won’t pay to rebuild your home and you’re paying a whole lot more for it than you would if you’d voluntarily purchased a policy.
In the long run, you’re far better off to shop for competitive homeowners insurance online. If you need to save money, go with a higher deductible and take advantage of every available discount such as multiple-policy discounts and anti-theft discounts.
Also, always read everything your mortgage lender sends you and keep copies of your correspondence with them in case you have to dispute a charge.