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Owning a home is a dream come true for many people. However, home ownership comes with a slew of responsibilities. One of those responsibilities is obtaining a home insurance plan if you take out a mortgage. We will delve into why that’s necessary. If you’re searching for an insurance agent serving Bloomfield, NJ, and other nearby communities, consider contacting E.S.T.I.R. Inc.
Why Lenders Require Home Insurance
Mortgages are asset-backed loans, which means that an asset is utilized as collateral to secure the loan. In the context of a mortgage, the home purchased with the loan is often used as collateral. Consequently, if homeowners default on their mortgage payments, the bank can seize and sell the home to recoup the money they’re owed.
While the bank doesn’t own the mortgaged home, it has a financial interest. All other factors being equal, the more valuable the property, the lower the bank’s risks. If a house is damaged, perhaps by a storm, its value decreases. This implies that the bank’s risks would be amplified if everything else remains constant. Banks typically mandate that homes bought with a mortgage have home insurance to minimize risks.
In addition, if a home is severely damaged or destroyed and its worth diminishes substantially below the mortgage, the homeowner may cease making payments. This would leave the bank accountable for the mortgage, and when they sell the property, they may not recover the full amount lent. In essence, mortgages and home insurance make lending less risky and thus less expensive for borrowers.
If you need assistance with home insurance policies in Bloomfield, NJ, or other communities, consider contacting E.S.T.I.R. Inc.