When people hit tough economic conditions, they always look for expenses to cut. These expenses can come in many different forms; cable TV bill, gym membership, home security system, etc. Of all expenses to cut out, home insurance should be one of the last, because it actually can have the opposite effect in the long run!
Insurance is required by mortgage companies
If you have a mortgage on your home, not paying your home insurance can really cause you trouble with your mortgage company. Nearly 100% of all mortgage companies require owners with loans to have home insurance. Unless you own your home outright, you technically don’t own it; rather, the bank is lending you money so you can live in the home while you pay it off. Until you own it outright, you have to abide by certain laws that the mortgage company requires; one of those is purchasing insurance.
Force-placed insurance is bad news
If you choose not to purchase insurance, your mortgage company will force-place insurance on your home. This means that the mortgage company will buy an insurance policy for you, and roll the costs of the policy into your monthly mortgage payment. The cost of force-placed insurance is typically 4 – 10 times more expensive than an insurance policy you could find on your own. In addition to that, the coverage is always the worst type of insurance coverage available.
Not buying insurance is counter-intuitive
As you just read above, not purchasing insurance will only result in your mortgage company buying very terrible insurance and charge you way more than you would otherwise pay if you bought insurance on your own. Once homeowners understand this, it makes complete sense why cutting insurance to save a buck or two not only doesn’t work, but also has the opposite effect that it’s trying to solve. To most owners, it may seem very counter-intuitive how dropping home insurance can end up costing more even without claims! After home owners understand the concept of force-placed insurance and how much more expensive it is than regular insurance, however, it begins to become much more clear.
Any type of home insurance policy should do
Most mortgage companies don’t really care what type of policy you purchase. Of course, most mortgage companies would like you to purchase HO3 or HO5 insurance because they are the best home insurance policies available. But the HO2 or HO1 are usually acceptable policies. Also, if you live in a condo or townhome, typically the HO6 is the only acceptable insurance policy. As a home owner, you do have quite a few options available. Mortgage companies just need you to pick at least one.
Rather than no insurance, consider downgrading insurance
If you are really looking to save some money on your home insurance, the best bet would be to downgrade your policy from a more expensive policy (the HO3 or HO5 as mentioned above) to a less expensive policy (the HO1 or HO2). Coverage on the lesser policies is significantly worse than more expensive policies. Purchasing a poor-coverage home insurance policy is, however, always recommended over purchasing no insurance policy.