If have a 100,000 dollar mortgage why can't i have only a mortgage ins. policy to cover this amount?

Asked by Jt, 36582 Wed Mar 9, 2011

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Corey Grushin, Agent, East Brunswick, NJ
Wed Mar 9, 2011
Jt the reason being is the insurance is to cover the cost to rebuild the home to it's existing status. The loan and it's rating are based on the loan to value ratio which the bank wants to make sure stays the same or better because it affects the rating for investment purposes of the securities sold against it. Also a mortgage loan is securitized by a occupiable home.
So say your home is worth $400,000 at the time of the $100,000 loan. The Insurance company figures it would cost $300,000 to rebuild the home to the standards set forth by their industry at time of the loan. Your loan is based off a 25% loan to value so it has basically minimal risk to the bank as long as is has enough hazard insurance to again keep these same or similiar ratios ( 33% ltv for insurance terms). If you have only $100,000 in hazard insurance then your loan to value (from an insurance standpoint for the loan) is 100% and you don't have the ability to rebuild the home unless you have $200,000 laying around, thus the bank has a much higher risk.
I hope this explanation helps Jt.
2 votes
Mack McCoy, Agent, Seattle, WA
Thu Mar 10, 2011

So you're thinking that if the property sustains $125,000 worth of damage, you'll then pay off the mortgage and won't rebuild the home?
0 votes
Donald Steve…, Agent, Fontana, CA
Wed Mar 9, 2011
There are companies that will write your home at a market value or cash value policy. They are becoming more popular now that the difference between market value and replacement cost is greater than a 100%. An unscrupulous person could purchase a home for $100k and let a small fire become a big fire and collect $300k from the insurance company. It is called a moral hazard, in other words, a person would benefit from a total loss and could be encouraged to allow it to happen.

Some companies will only insure a home at replacement cost because that is the type of policy they have been approved to write through the insurance commissioner. Every company that wants to write an admitted policy in a state must have the product and rates approved by the commissioner. If you call a couple of independent insurance agents you may find one that can write you a market value or cash value policy. Just make sure you understand how a partial claim is paid and if there is coinsurance. Some companies that write market value or cash value policies will offer a rider for additional premium that will give you replacement cost coverage on a partial loss and the insurance policy maximum for a complete loss or a loss greater than the amount of insurance.

The last thing is the mortgage company. Depending on the state, they hold the note and title on the home. They may not want to be cashed out in a total loss because they will lose investment income. They might want your home rebuilt so you will continue to pay interest for the life of the loan. They paid commissions and did the underwriting on the loan and they want to recover not only the loan value, but their costs, and hopefully earn some money on lending you money. The mortgage company may hold the gavel on whether you can consider anything but a replacement cost policy.

.Be careful and good luck.

The Home Insurance Specialists
My Landlord Insurance

0 votes
Rodney Mason, Mortgage Broker Or Lender, Atlanta, GA
Wed Mar 9, 2011
The mortgage industry has minimum standards for home owner's insurance. The policy coverage must cover:

* The loan amount or
* 100% Replacement Cost coverage (i.e., the Total Estimated Cost New on the appraisal) or
* Guaranteed Replacement Cost (per the Guaranteed Replacement Cost Endorsement from the insurance agent).

Rodney Mason
Sr Loan Officer / FHA 203K Renovation / HomePath Specialist
Prospect Mortgage
Atlanta, GA
(404) 591-2453
NMLS #151088
Apply Online at http://www.rodneymason.com
Licensed in AL & GA
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