Of course they have a right to the insurance money. I checked my mortgage which does say something like - “if you don’t repair or replace the property after it is destroyed - we get the money and we will give you anything that is left over after we apply it to your balance.” I’m paraphrasing, but there is nothing in there that says they can cancel the loan or force you to pay the rest early.
Of course - if you are properly insured - there won’t be any rest (well maybe with the way the market is/has been). So I’m not sure how this would help the OP.
My point was I don’t think they can make you pay off the mortgage, but I guess that really doesn’t matter - as the OP is trying to avoid having to have a new mortgage. My mortgage uses the words “repair or restore” or some form of those words - so it clearly contemplated restoring the building. I am pretty sure even if my place burned to the ground - I’d still have my same mortgage. The wording seems to me to suggest if you are deciding to abandon the property and move somewhere else - then yes you’d be screwed, but otherwise you can keep your mortgage.
I do not at anytime expect that I’d be able to run off with the insurance money, but I would expect to be able to rebuild and keep my mortgage while I/we rebuild.
I don’t understand what you mean here. The insurance proceeds paying off the mortgage has the effect of ending the loan contract. Once the balance is paid, there is no loan. If you want to finance reconstruction, you have to get a new loan.
I also don’t understand what this means. If your house burns down 29 years into a 30 year mortgage, of course the vast majority of the insurance proceeds would be yours to keep and only a small portion would go to retiring the remaining balance on the loan.
YMMV, but were it me, I would be paranoid about calling my insurance company with a question about a hypothetical fire, just in case my house really did burn down later.:eek:
Your second paragraph doesn’t follow from your first.
The bank can seize the property “should repayment not happen as promised”, as you write. But here repayment is happening as promised. The only change is that their collateral has become devalued.
That’s true. What of it?
If the bank would only put in terms that favor them they would be undercut by other banks that offer more favorable terms. There are any number of terms in mortgages that don’t favor banks. You can’t just assume that a theoretical term can’t exist because it doesn’t favor the bank.
Same point. There are any number of terms which add to the bank’s risk and any number of others which add to the borrowers’.
Which does happen in various parts of the world. I know a house in Norway where after the fire, the insurance company pays to escrow and the escrow fund pays to the builders who are rebuilding. The issue is that the insurance policy said the replacement house can be 125% of the value of the house that was lost.
Now they can’t just ask for a house to be built, and then pay for it, because the cost may turn out to be too much or too little. So they pay in tranches, eg every month, and monitor the progress along the way.
If the owner requests the builder to build the ground floor extravagantly, the insurer can then insist the top floor be built with chipboard and pitch.
Its the same with building a house via a mortgage. if the insurer pays out the mortage, then the owner just gets a new mortgage, which will be paid out in tranches as the building progresses, or paid to a builder on completion . In the case of pay on completion, the builder will have a caveat/lien on the property , and will charge more (its just like charging bank interest then !).
Anyway the insurer may do the escrow as the rebuild may be completed well below than the upfront estimate of the rebuild cost. Because the insurer has experienced building cost managers - who tie builders down to the least cost (Not the fastest progress !)
You may have missed the important point that the bank wants at all times to be able to legally seize and sell property that’s at least as valuable as the amount owed.
They care very much about this even if payment is happening on schedule - they want their money this month, and they want full assurance that any outstanding amount will be paid in future. So a normal mortgage will specify that certain things happen (e.g. insurance payout flows to them) when collateral has become devalued.
Well to the first part - There is nothing in my mortgage - that I see -that says I can’t rebuild with the proceeds. It specifically mentions if you aren’t rebuilding or repairing - then they would use it to pay off the loan. I do to see anything that says if it is burned to the ground we are keeping the money and you have to get a new loan. I have no desire to finance reconstruction - the insurance company will pay to rebuild my house - if they don’t THEN the mortgage company will keep whatever I owe them and give me the rest. My insurance is pretty good and I know includes hotels and what not while this is being done. I paid good money for my insurance and I expect them to do what they said they would.
As far as the second part goes - I was looking at it from in the early part of the cycle. It seemed with the OP talking about properties possibly being underwater - and having to take out a new loan and being very worried about it - that that was his concern. Of course if you are at year 29 - there isn’t going to be much of an issue. I should have been clearer and didn’t write that part clear at all. I can see how it didn’t make sense,
You still seem to be missing the point: The issue doesn’t wait for repayment to stop.
Even if you continue to pay on time, the bank assumes it’s possible this could cease at any moment, and wants assurance that even if that should happen they will not incur a loss. So the terms of a typical mortgage will specify that if the value of the collateral is damaged, certain things happen to protect the bank.
I’m sorry if I missed this point being addressed above, but the value of the property is not just in the home, it’s also in the land. My house is insured for much less that the value of my total property. If my house burnt to cinders it would cost X dollars to rebuild, and is insured for that amount, but the property can’t be destroyed…except under circumstances where rebuilding the house would not be a worry.
Depending on your insurance, normally with a mortgage you must have a household insurance that covers the house against fire, water and the death or the mortgage/house owner. This usually has to have a cover of at least the mortgage amount during the repayment of the mortgage.
This is at least what we had to do, before our mortgage provider agreed to lend us the money to build.
