What could be worse than foreclosure??  Foreclosure due to being UNDERINSURED.

Many homeowners slide by on their homeowners insurance policy figuring that when the worst happens, they will get paid.  The sad truth is that many homeowners will actually come up short on coverage if their house is totally wiped out.  When the homeowners policy does not cover the dwelling and the borrower does not have the money to make up the difference, the lender can and will call the note due to lack of repair.

Why does this happen? 

Many homeowners do not update their policies to the current value of their home.  They don’t realize that the insurance company doesn’t automatically increase the coverage of their policies.  Why not? because that means raising the price of the policy - something most people don’t want to hear.

Here in Florida, we have a pretty tough skin when it comes to Insurance costs fluctuating.  It is pretty much going to happen annually whether we like it or not.   We’re very aware of our insurance here due to the weather of the past few years.

What should homeowners be aware of? 

Every year or so, it is smart to call your insurance agent and discuss your homeowners policy.  Most homeowners don’t even think about it because they escrow payments for insurance in their monthly mortgage payment. 

Calling your insurance agent and reviewing your policy will allow them to analyze your property and ask questions to find out how and if your policy needs to be altered. 

What changes need to be made?

The main alteration that most people need is an adjustment to the replacement cost of the dwelling.  The replacement cost is exactly what it sounds like - the cost to replace the dwelling in the case of complete loss.  The costs factored in here are strictly construction and materials based on today’s market. 

For instance, if there is a worldwide shortage of gypsum, then the price of drywall will rise.  This will mean that your coverage might not be enough to cover the cost of a complete loss.The replacement cost is estimated in the appraisal upon purchase and refinancing, the two main instances of homeowners insurance analyses.  The insurance agent has tools to update these figures to present time to make sure each client is properly covered.

As most people do not refinance every year, calling to make sure your coverage is up to date is a vital conversation to have.  As a Mortgage Broker, it is part of my processing that the insurance company is alerted and is included on the mortgagee clause.  This means that even if the homeowner forgets to call, it will be taken care of for them.

Realtors: Don’t let this happen to you or your clients… when you are sending cards on the anniversary of closing, insert a reminder to call their insurance agents to make sure their coverage is up to date!

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David A. Podgursky, MBA
The Mortgage Go To Guy
Your Source for Residential, Commercial, Investment and Relocation Mortgages in Florida