Most mortgages require a homeowner to maintain homeowner’s insurance for their property and to name the mortgage company as an additional insured party to the insurance. Some mortgage companies collect an escrow for both real estate taxes and homeowner’s insurance. However there are a number of mortgage companies that do not collect escrows for homeowner’s insurance. Often times a homeowner who is in financial distress will decide not to pay their homeowner’s insurance, believing that their mortgage company will foot the bill (at least for the time being). However this strategy will almost always backfire for two important reasons.
First, forced placed insurance (the kind of insurance a mortgage company will obtain) is universally more expensive than standard insurance. Under the terms of the mortgage loan with the bank, the homeowner will be responsible for paying back the mortgage company. Perhaps not today and perhaps not even in the next year, but when the time comes to pay off the mortgage or refinance the mortgage, the homeowner will find that they have to pay back the mortgage company.
Second, forced placed insurance doesn’t protect the homeowner at all! Forced placed insurance typically only protects the mortgage company’s interest in the property. This means that the insurance only protects up to the loan balance of the property. If there is equity in the home, that equity is not protected! Not only this, but forced placed insurance does nothing to protect the homeowner from other things that might happen on their property, such as another person being injured.
Even if you have decided that you will be walking away from the property, it is still vitally important to obtain insurance coverage that protects you. You might not care if the property deteriorates, but if someone gets hurt on the property while you still own it, you are the one who can and will get sued!