Here’s Why Lenders Require Home Insurance

Posted on February 21, 2023March 1, 2023 by admin

Did you know that Americans hold more than $10 trillion dollars in mortgage debt? In fact, roughly 70 percent of all debt in the United States is tied up in mortgages. Generally speaking, mortgages are considered good debt because they allow folks to build up equity while satisfying an essential need for shelter.

Typically, the organizations extending loans for mortgages require that homeowners take out home insurance. We’ll look into why, but if you’re looking for home insurance, get in touch with Weber Insurance, serving Hanover, PA and other areas nearby.

Why Lenders Mandate Home Insurance

So why do lenders require that borrowers take out home insurance? We’ll dig into the details shortly, but the short answer is that lenders want to protect themselves. Mortgages are “secured” debt, meaning the loan is tied to collateral. In the case of mortgages, that collateral is typically the house or property bought with the mortgage.

If the borrower stops making payments on the mortgage, the bank will be able to take possession of the home or other property. Then, they can sell the property, thus recouping some or all of their losses. As a result, the mortgage itself is a relatively low-risk type of loan. With unsecured loans, banks can’t take possession of collateral.

Low risks allow lenders to extend loans with relatively low-interest rates. Mortgage interest rates began to rise in 2022, but the average rate was still below 7 percent. In 2021, mortgages with interest rates of less than 4 percent were pretty common. Yet if a home is damaged, say in a storm, it’s going to be worth less. This means the collateral for the loan is worth less as well. For the lender, this results in increased risks.

To protect their interests, lenders, including banks, require that homes bought with mortgages be covered by home insurance. This insurance protects not just the home and homeowner, but also the lender and its interests.