Hazard insurance protects a homeowner against the costs of damage from vandalism, fire, smoke and other causes. When you take out a mortgage, the lender will require you to take out hazard insurance to protect their investment; lots of creditors will incorporate the insurance payment to your monthly mortgage payment.
Hazard Insurance
Hazard insurance isn’t synonymous with homeowners insurance, since it only covers physical harm. Homeowners insurance includes hazard insurance and liability coverage. Hazard insurance may protect only against specifically named damages, or it may cover all kinds of harm except those specifically excluded.
Extra Protection
You may need more coverage than the minimal hazard insurance required by your creditor. In areas subject to certain dangers–earthquakes and wildfires in parts of California, for instance–hazard polices might not cover against them if you don’t pay extra to get a”rider” on your policy. You might also need additional insurance for artwork, jewelry, collectibles or business equipment that isn’t covered by a regular hazard policy, states the Nolo legal site.
Difficulties
In certain countries, including California, it is difficult to find hazard insurance because of high claims rates previously, Nolo states. You could also find it difficult if you have filed hazard claims before. The site urges you avoid filing hazard insurance claims unless you absolutely need to, and that you create any contract to purchase a home contingent on being able to purchase insurance for this.
Escrow Account
Many lenders make sure the hazard insurance premiums are compensated by including the total cost of their premium, along with property taxes, at the monthly mortgage payment. To do this, the creditor creates an escrow account from which the invoices are paid, then deposits a part of your mortgage payment in the account each month. The Mortgage Professor website recommends checking your invoices to be sure that the lender is currently paying the right amounts.
To Escrow or Not?
It’s your lender’s choice whether you are required to pay for hazard insurance using an escrow account or not, although federal and some state laws restrict how much cash you are required to put in escrow. Some homeowners prefer a lender who’ll deal with the monthly payments, the Mortgage Professor states, while some prefer keeping track of their own invoices. If you’ve got a choice, one factor you may consider is whether you’ll get interest on the account. In California, for example, escrow accounts are not interest bearing unless the debtor requests otherwise and meets various legal conditions.