Policy amount relative to mortgage

[JustAPal00]

You do not have to pay back a mortgage when your house burns down unless you chose not to rebuild the house! You should insure your house for the replacement cost. Most lenders will require guaranteed replacement cost be on the policy. The policy will also include: Loss of use - This will pay for another place to live while your house is being rebuilt. Personal property - To cover your belongings. Additional structures - Covers your shed or detached garage. There is also coverage to remove the old wreckage and prepare the lot for the new structure!

 

[seniorjudge]

...You do not have to pay back a mortgage when your house burns down unless you chose not to rebuild the house!...

You wouldn't happen to have any law to back up that statement, would you?

 

[moburkes]

It doesn't protect anyone to over insure since you won't get paid the full amount on a replacement cost policy!

That is simply not a true statement. I will provide you with an example.

If it would cost $325,000 to rebuild your home, and you insure it for $325,000, you are insuring your home for 100% of its replacement cost. However, in the event of a catastrophe, and many homes are damaged, licensed contractors will be in high demand, but short supply, and, therefore, they can, and, will, charge a premium for their services. Materials, also in high demand and short supply, will be more expensive than normal. Also, potentially, the cost to remove the debris, may be more expensive. So, suddenly, it costs $375,000 to rebuild your home. Who is the one who has to come up with the difference? (Hint: It won't be the insurance company.)

Also, at least 60% of the population is uninsured. Plus, each insurance company will have a different replacement cost for your home.

 

[JustAPal00]

You wouldn't happen to have any law to back up that statement, would you?

Where does the law come into the question? I borrow money from a bank to buy a house. The bank has a lein against the house and the land it's on in case I don't pay. Durring the loan term there is a major fire which destroys the house. The insurance company pays to rebuild the house. The bank still has a lein on the house and the land it's on.

Let's say I buy a house in Malibu, right on the beach! The home may be valued at $5,000,000. The actual value of the structure may be $500,000 and the other $4,500,000 is the land. When insuring this property I would be required to carry enough insurance to rebuild the home or $500,000 with guaranteed replacement cost.

Now let's say I buy a home in Baltimore, an old row home in the slums. I might pay $50,000 for that house, but have to insure it for $150,000 because that's what it would cost to rebuild it.

 

[moburkes]

Where does the law come into the question? I borrow money from a bank to buy a house. The bank has a lein against the house and the land it's on in case I don't pay. Durring the loan term there is a major fire which destroys the house. The insurance company pays to rebuild the house. The bank still has a lein on the house and the land it's on.

Let's say I buy a house in Malibu, right on the beach! The home may be valued at $5,000,000. The actual value of the structure may be $500,000 and the other $4,500,000 is the land. When insuring this property I would be required to carry enough insurance to rebuild the home or $500,000 with guaranteed replacement cost.

Now let's say I buy a home in Baltimore, an old row home in the slums. I might pay $50,000 for that house, but have to insure it for $150,000 because that's what it would cost to rebuild it.

His point is that there is no law against the mortgage company requiring you to pay the loan in full, upon notice of a total loss.

 

[JustAPal00]

His point is that there is no law against the mortgage company requiring you to pay the loan in full, upon notice of a total loss.

Is there ever really a total loss? The land has value! Like I said originally, if you decide not to rebuild then you have to pay off the loan with the money you got from the insurance. But if your plan is to rebuild then you would continue on with the original loan.

When I first got married my wife and I bought a row house. We were required by the bank to carry GRC. The cost to rebuild was twice what we paid, so we had to insure it for that amount. We sold it to a woman four years later and a year down the road it burnt to the ground. She paid off her loan, cleared the lot, and pocketed the rest!

 

[moburkes]

The land has no value to the insurance company. And the insurance company is not required to pay replacement cost in 2 situations. 1. When the property is underinsured. 2. When the insured chooses not to rebuild. So, while that situation worked in your friend's favor, it doesn't always work that way.

 

[JustAPal00]

The land has no value to the insurance company. And the insurance company is not required to pay replacement cost in 2 situations. 1. When the property is underinsured. 2. When the insured chooses not to rebuild. So, while that situation worked in your friend's favor, it doesn't always work that way.

We're not talking about insurance companies! We're discussing wether a mortgage has to be paid off when a house burns down or is the home owner allowed to use the insurance payoff to rebuild! The point I made was the homeowner does not have to pay the loan off if they are going to rebuild. Now there may be some whacked out bank somewhere who wants the homeowner to pay it off and apply for a new loan so that they can charge all those fees again, but I doubt many of those lenders are still in business!

 

[moburkes]

We're not talking about insurance companies! We're discussing wether a mortgage has to be paid off when a house burns down or is the home owner allowed to use the insurance payoff to rebuild! The point I made was the homeowner does not have to pay the loan off if they are going to rebuild. Now there may be some whacked out bank somewhere who wants the homeowner to pay it off and apply for a new loan so that they can charge all those fees again, but I doubt many of those lenders are still in business!

I know what we're talking about. My point is that, in many situations, the amount of coverage on the policy may not be enough to pay off the mortgage, especially if the home is underinsured.

 

[JustAPal00]

The mortgage amount has nothing to do with the insurance amount. You are to insure your home for what it costs to replace it, not pay it off! If there is a total loss and you are insured properly then you have enough to rebuild it to as close to original as possible. You can then sell it and pay it off. There are many instances, especially here on the east coast, where properties have to be insured for more then their mortgage amounts. In those cases if there is a total loss, the homeowner has the option of paying off the loan, removing the debris, and pocketing the balance. Being underinsured has nothing to do with your mortgage amount. It means either you or your agent made a mistake!

 

[moburkes]

Being underinsured has nothing to do with your mortgage amount. It means either you or your agent made a mistake!

I agreed with you up until this point. You are correct in that one has nothing to do with the other. Agents can, and do make mistakes. Agents aren't robots or computers. Customers OFTEN make mistakes. Customers also let policies lapse, when their mortgage contract doesn't allow it. Things happen for lots of different reasons. In any case, there are times when even insuring your home for replacement cost isn't enough. One specific example is when there is a catastrophe and the local contractor costs are more expensive than what the policy originally anticipated. That's why guaranteed RC and additional replacement cost are so popular - because they actually come in handy and have been used to their full capacity many, many times.

 

[JustAPal00]

I agreed with you up until this point. You are correct in that one has nothing to do with the other. Agents can, and do make mistakes. Agents aren't robots or computers. Customers OFTEN make mistakes. Customers also let policies lapse, when their mortgage contract doesn't allow it. Things happen for lots of different reasons. In any case, there are times when even insuring your home for replacement cost isn't enough. One specific example is when there is a catastrophe and the local contractor costs are more expensive than what the policy originally anticipated. That's why guaranteed RC and additional replacement cost are so popular - because they actually come in handy and have been used to their full capacity many, many times.

Myself along with others stated earlier that "guaranteed rc" is required by almost all lenders. That's never even been an issue in this discussion! Being "underinsured" would mean not having enough insurance. Being "uninsured" would happen after a lapse. There are two ways a person becomes "underinsured":1. They give their agent incorrect information. Or 2. The agent makes a mistake! So like I said above "It means either you or your agent made a mistake!"