Why Homeowners Carry Insurance Or Else

By Juhlin Youlein

Most items that an American consumer will purchase in their lifetime are going to be relatively simple things or objects that have little bearing on the overall outcome of their life. A great example is the cell phone. Almost all Americans have a cell phone. Cell phones themselves have a huge bearing on anyone´s life but not the actual cell phone. A consumer can simply go to a local outlet and sign up for the plan they want and buy the phone they want. Another example is clothes shopping. Pick out the shirt or jeans that look good go to the counter and the consumer has a new outfit with little trouble. Sometimes, even with clothes shopping the consumer does not have the money ready at that exact moment and will open a line of credit that can easily be paid back at a future date.

Occasionally a consumer will want a new car. Cars cost a little more than clothes or phones and often times the buyer will not have the money for the car and will be able to finance the car through the dealer. A little paperwork, a plan to pay it off, and the consumer has their car.

Homes are totally different from cars, clothes and phones. Homes are on a price scale unlike any other object a consumer can buy. They take an astronomical amount of money in comparison and only a really small percent of the population can pay off their home upfront. In order to finance a home, a consumer will have to go through a bank or mortgage broker. Mortgages vary in that they can be either fifteen year mortgages or thirty year mortgages and have a fixed interest rate or adjustable interest rate. Where they do not vary is that the home is the collateral for the loan. Meaning that if the borrower, or homebuyer does not make good on their monthly repayment of the loan, then the bank may foreclose on the home and resale it to try and get back the money from their loan.

The real catch is if the bank somehow loses that collateral. A lenders worst nightmare is for a freak earthquake, midnight electrical fire, flood, hurricane or some other unexpected, and totally destructive natural disaster to suddenly come and destroy the home because then the borrower can walk away and the lender no longer has nay way to recover their capitol.

Because of the high cost of losing a home, banks require that anyone who is going to get a loan from them have homeowners insurance, no exceptions.

Herein lies a problem. The loan repayments are once a month instead of once a year, which is smart because it is a whole lot more likely that any person can make a small monthly payment over a large yearly one. But insurance payments are only once a year. So a buyer is a lot more likely to not have the money ready for that once a year payment. The answer is a mortgage company will set up an escrow account where the money is paid every month and put into a fund that will pay the insurance at the appropriate time.

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