If you are a homeowner, paying off your mortgage every month is a priority. But what if your home is destroyed – if a hurricane, tornado, fire, or other disaster destroys the structure right down to the studs? Here, we’ll tell you what to expect and whether or not you should continue to pay your mortgage.
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The answer is yes
Yes, you have to keep paying your mortgage every month, even if there’s nothing left of your house. If you are tempted to walk away from all of this, do not give in to this temptation. Leaving a destroyed home will impact your credit score in exactly the same way as moving away from a perfectly functioning home.
The power of insurance
It’s easy to complain about the cost of home insurance, but home insurance is your best friend after a disaster. Mortgage companies insist that people buy home insurance for a good reason: they want to protect their investments. Requiring homeowners to carry at least enough insurance to rebuild benefits the mortgage company. After all, your home is the collateral that secures your mortgage. But good insurance also benefits homeowners.
Will this be enough?
While this may seem like the most boring way in the world to spend 10 minutes, call your insurance agent. Find out how much your home is insured for. According to Marshall & Swift / Boeckh, almost 60% of homes in the United States are 18% underinsured. In other words, if these people lose their house, they will have to pay a significant sum to have it rebuilt.
Let’s say a house burns to the ground and it costs $ 250,000 to rebuild it. An 18% underinsured homeowner will have to shell out over $ 45,000 to get the job done. If they don’t have the funds in a savings account, they may need to borrow.
Replacement cost coverage
If a house is destroyed, the homeowner’s insurance policy should cover the cost of their stay elsewhere while the house is being rebuilt. Yet without the right coverage, the homeowner could be liable for unforeseen expenses.
If you’re worried that you won’t have the money to rebuild your home after insurance pays off, replacement cost (RRS) might be a relief. While the premium for RCV costs more than standard homeowners coverage (the amount varies by insurance company), RCV covers all expenses to repair or replace an entire home.
In addition, RCV ensures that the house is rebuilt as new. Let’s say a house has some unique features, like hardwood floors with an intricate pattern, an upgraded HVAC system, and a soundproof recording room. Standard coverage is unlikely to cover the additional costs associated with installing these upgrades, but RCV will.
Back to your agent
While you are on this call with your insurance agent, be sure to ask questions about potential gaps in your coverage. For example, what happens if a flood sweeps away a house? A standard policy is unlikely to cover flooding, so find out how much it would cost to add coverage.
And what about the seismic coverage? It’s tempting to skip earthquake insurance because the deductibles are so high (typically 10-20% of the coverage limit). But let’s say a homeowner’s deductible is 10% and it would cost $ 300,000 to rebuild their house after an earthquake. This means that their share of the cost would be $ 30,000 ($ 300,000 x 0.10 = $ 30,000). Although $ 30,000 is a lot of money, that owner would still have some cash up front by paying the franchise rather than losing their property entirely.
A quick note on earthquake insurance: Earthquakes can happen anywhere. The largest earthquake in the lower 48 states occurred in the Missouri standeel. And according to the US Geological Survey, 42 of the 50 states have a reasonable chance of experiencing an earthquake. Those who live in states where earthquakes are rare may find it relatively inexpensive to add earthquake coverage to their home insurance policies.
Your first call following a loss should be addressed to your insurance company. Your second should be with your mortgage lender. Not only will your lender want to know their loan collateral has been destroyed, they’ll probably want to help. For example, if you own a home-based business and the loss of the house will interfere with your ability to make your mortgage payment, your lender may offer you a forbearance. Although they are not legally required to help, most lenders will because it is a much better option than foreclosing on the property.
No one particularly likes paying insurance premiums, but most would agree that knowing they are covered helps them sleep at night.