Is it true that houses with mortgages pay more for home insurance? (mortgage, sale)
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I was debating with a friend of mine about buying a house with all cash or with mortgage
And he said apart from savings from not paying interest and closing costs, I will also be paying less for home insurance if I own the house with no mortgage.
If you use a lender, they will require a specified amount of insurance. The bank will require you to prepay your insurance in your monthly mortgage payment. This is perfectly normal. I don't think that you would pay any more for insurance than if you paid cash.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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The lender will require that you are covered for at least the amount of the mortgage, while a cash sale means you can do without insurance if you like, or you can insure for less than it would take to rebuild, so in that sense yes. On the other hand, it would not be a smart move because in case of a disaster you wouldn't be able to restore it to the same as it was without additional out-of-pocket. Most people insure for replacement cost, and increase it as materials/construction costs go up with inflation. We review every two years.
The insurance rates are the same. However, if you own outright you can choose to have a very high deductible - higher than what the mortgage company would allow if you had a mortgage. So the savings would be due to the higher deductible.
Also you can choose to forego insurance completely, which is a savings as long as you don't need to file a claim. However, if a tornado comes through and wipes out the home and you don't have insurance, then it really wasn't a savings after all. But if you don't have a mortgage, it's a risk that you can choose to take. If you have a mortgage, you must have insurance per the lender's rules.
I was debating with a friend of mine about buying a house with all cash or with mortgage
And he said apart from savings from not paying interest and closing costs, I will also be paying less for home insurance if I own the house with no mortgage.
Is this correct?
Ask your friend to elaborate on how you will pay less for home insurance if you have a house with versus without mortgage. Your friend may end up getting an education on how insurance work as well. Can't determine whether he is correct or not without know his/her logic.
I was debating with a friend of mine about buying a house with all cash or with mortgage
And he said apart from savings from not paying interest and closing costs, I will also be paying less for home insurance if I own the house with no mortgage.
Is this correct?
No, your friend is incorrect. As others have said, lenders require a minimum amount of insurance, but if you own the house outright, you can insure it for any value you would like (say zero, in which case you have no insurance). However, for the same amount of insurance, your equity is not relevant.
Furthermore, I paid off my house a couple years back and there was NO change to my insurance.
If that doesn't convince your friend then point out how at no time are you ever asked about the size of your mortgage or if it's paid off....by the insurance company which tells you that it is not a rating variable.
There are so many "old wives tales" and outright disinformation surrounding insurance out there it's kinda scary.
If you use a lender, they will require a specified amount of insurance. The bank will require you to prepay your insurance in your monthly mortgage payment. This is perfectly normal. I don't think that you would pay any more for insurance than if you paid cash.
I didn't have to pay my insurance with my mortgage payment. The insurance carrier had the name of the mortgage company as lienholder on the policy and if I defaulted, they would notify the mortgage company. If that occurred, the entire amount of the mortgage would become due unless I could prove that I had replaced the policy with one with like terms.
After I paid off my mortgage, it seemed that my insurance increased every year. I finally told that company "AMF" and took out a policy with a different company at about a third of the cost - coverages all identical and in one case, increased.
It pays to shop around.
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