Paying off your mortgage is a huge accomplishment that should be celebrated. This means that you won’t have to pay yearly or monthly payments for your mortgage and can either put it in savings or use the money elsewhere. You may also have the option to change your insurance policy.
However, completely cancelling your policy is not typically recommended.
In short, you may not be required to carry home insurance any longer once you pay off your mortgage. Since you no longer have a lender, they will not require you to carry insurance. There are exceptions, however, and you do not necessarily want to go without home insurance.
What Happens to Money in Escrow?
Say you have money in escrow with your lender to use for homeowners insurance and property taxes. What happens if you pay off your mortgage while you still have money in escrow? If you have money left over, you may receive a refund from your lender. If you are unsure about whether or not you will get a refund, be sure to ask your lender.
Also keep in mind that paying off your mortgage will not affect your property taxes. However, instead of paying through your lender, you will have to remember to pay directly.
Why Do You Need Home Insurance?
Once you purchase a home, you face a lot of risks. A home is expensive to upkeep and can be even more expensive to repair after a bad storm or disaster. Sometimes, homeowners won’t be able to afford thousands of dollars out of pocket to fix their home after a disaster. It is especially important to consider disasters that may destroy the home completely and render it uninhabitable until it is repaired.
Although this may seem unlikely, this occurs an unfortunately frequent amount. With the increasing and unexpected natural disasters that have been plaguing the U.S., it is more important than ever to make sure you have the ability to recover after a tornado, earthquake or flood. Even under a basic home insurance policy, earthquake and flood damage may not be covered. If you live in an area where either of these dangers are frequent, you may want to ask about additional insurance.
Simply paying off your home does not absolve you from these risks, either. It simply means that the bank is no longer responsible for your home or any damages it may suffer. If you decide to drop your home insurance coverage after paying off your home, you must expect to pay for repairs or even a complete rebuild out of pocket after an accident.
For example, say you drop your coverage after paying off your home’s mortgage so that you can save money. A few weeks later, a bad storm sweeps in and destroys a section of your roof, causing leaks and water damage. Since you no longer have home insurance, you will have to pay for expensive repairs to your roof by yourself. With an insurance policy, you could file a claim and possibly receive compensation to help with the costs.
It is always recommended that you speak to an insurance agent before making drastic changes or cancelling your home insurance policy. If you can afford to rebuild your home out of pocket after a disaster, you may not want a home insurance policy. Most people cannot afford this, however, so it is important to maintain a home insurance policy.
How Much Home Insurance Do You Need After Paying Off Your Mortgage?
This does not mean that you have to maintain the same amount of coverage, however. Lenders generally require you to carry enough home insurance to cover your mortgage. Insurance agencies, on the other hand, recommend that you carry enough home insurance to cover the total replacement cost value of your home. The total replacement cost value is how much it would cost to completely rebuild your home after a disaster, including building and material costs. This amount is not the same as your mortgage, nor will you have to pay for the entire value.
For example, say your home’s total replacement cost value is $300,000. This is the amount of coverage you should carry—not the amount you will pay for insurance. Your home insurance premiums will be affected by the same factors as before you paid off your mortgage. This includes your location, claims history, credit score, deductibles and more.
After the requirement for your home insurance is gone, be sure to keep in tact with your home insurance provider in order to ensure that your home is protected for as much as it needs to be. In general, you should carry 100% of your home’s total replacement cost value in home insurance whether or not you’ve paid off your mortgage.