The vast majority of home buyers use some type of mortgage loan to pay for their home. If you are one of them, then you likely know how much paperwork and fine print is involved.
While you can’t be expected to commit every term of your mortgage loan to memory, it is important to be aware of certain key provisions. A typical mortgage contract specifies exactly what type of homeowners’ insurance you need and how much of it you are required to carry. For instance, you may need coverage protecting your home from fires, robberies, or other specific types of damage.
Typically, you need enough coverage so that your insurer would issue a claim allowing full repayment of your home mortgage in the event of a disaster. You may also be required to carry special insurance policies, such as flood insurance or wind insurance, depending on where your home is located.
If you fail to always 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.
Costs & Risks of Force-Placed Insurance
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 generated $5.5 billion in 2010.
When lenders purchase force-placed insurance, the costs of the often exorbitant premiums are typically tacked on to 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 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.
Avoiding 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.
In some cases, however, even this isn’t enough, as some homeowners have had force-placed insurance purchased on their behalf for hazard insurance that they weren’t given sufficient time to buy on their own. For instance, a homeowner might not need a flood policy for his home, and therefore does not purchase it. However, if the insurance requirements change and he is suddenly told he does need a flood policy, he may not have time to buy it before the mortgage lender purchases a costly policy on his behalf.
How to Take Action
If you experience a lapse in coverage or if your lender purchases insurance that you did not yet have or were not expecting to need, it is important to take action right away:
- 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.
- Be on the lookout for notices from your lender indicating new insurance requirements. If you receive a notice, act quickly and purchase the required plans immediately.
- Contact your mortgage lender as soon as possible if force-placed insurance has been purchased for you. You may need to contact your lender via phone, as well as in writing. Be prepared to provide adequate proof of insurance, and continue to follow up until the force-placed insurance is removed. This may take several phone calls.
Though the Consumer Financial Protection Bureau has been trying to protect consumers from force-placed insurance and high premiums, it is ultimately up to you to take the precautions to avoid this major expense.
Having adequate homeowners’ insurance is important not just to meet bank and lender requirements, but also to protect your investment. However, there is no reason to pay more for insurance than is necessary. Keep your house adequately insured, and if a lapse does occur for some reason, take action right away to correct the problem – and be sure to have the mortgage lender cancel the force-placed policy.
Do you check your insurance policies carefully to ensure that you have the coverage you need?