As natural disasters and skyrocketing homeowners insurance costs continue to make headlines, it’s no wonder many homeowners find themselves fretting over potential “what-if” scenarios. Yet, channeling this anxiety into proactive steps can actually help mitigate some concerns.
All too often, individuals who experience overwhelming loss don’t fully understand how insurance payouts interact with mortgaged homes. This creates an additional layer of complexity, as they must also engage with their mortgage lender alongside their insurer.
“When a family has just lost everything, they simply cannot process all the additional mental load,” explains Brittnie Panetta, a personal injury attorney with Matthews & Associates who has assisted California wildfire victims. “The focus is on picking up the pieces and moving forward.”
Gaining a grasp of this process in advance can help you avoid unnecessary stress in a crisis. Let’s explore what happens to your mortgage if disaster strikes and your home is destroyed, the role of your mortgage company, and proactive steps you can take now to secure the necessary resources in case of a future catastrophe.
### First Steps
Despite the devastation, your mortgage doesn’t just disappear, notes Panetta—you are still on the hook for those payments. That’s why, after an adverse event, one of your first phone calls should be to your mortgage servicer. This is the firm you make your payments to, whether it started as your lender or has since transferred to another company.
If you’re struggling to cover immediate expenses, remember to inquire about forbearance. A mortgage forbearance gives your loan a temporary pause, allowing you to skip payments without late fees or harming your credit score. Keep in mind, though, this relief is temporary, not a forgiveness; eventually, you will need to catch up on those missed payments. Still, the short-term breathing room it provides can be invaluable.
Even if you’re able to continue making payments, informing your servicer about the situation is crucial. In fact, most mortgage contracts require you to notify the lender or servicer because they have a stake in your home, which can affect your next steps.
### Rebuild or Pay Off
In the aftermath of losing their home, homeowners face a tough decision: use their insurance funds to rebuild, or pay off the existing mortgage.
“It’s incredibly difficult,” acknowledges Jennifer Beeston, a branch manager and senior vice president at Rate, who has worked with Tubbs and Camp fire victims in California. “While you’re emotionally distressed, understanding the numbers and carefully weighing options becomes essential.”
Complicated insurance and rebuilding clauses in mortgage documents often distill down to a few main points. As mentioned, promptly notify the lender of any loss. Then, both the homeowner and lender must concur on whether the insurance funds will go towards settling the mortgage or rebuilding the home. If you choose to reconstruct, the new home should have a value comparable to the one destroyed, with the lender disbursing insurance payments accordingly.
For many, signing over the insurance check to the mortgage servicer comes as an unpleasant surprise.
“People were frustrated during the Tubbs fire because they didn’t want another entity controlling their finances,” Beeston recalls. “As much as it’s understandable, it’s the industry standard.”
While reconstruction is underway, continue paying your mortgage. This might mean shelling out for a property you can’t live in while also covering alternative accommodations. However, loss of use coverage, common in homeowners insurance, can alleviate these costs. FEMA housing assistance might also be available.
On the other hand, if rebuilding isn’t financially feasible or desirable, you must utilize the insurance payout to fully settle the mortgage on the destroyed property. It’s important to understand that insurance policies might offer lower settlements for payoff than for reconstruction.
“It’s becoming less appealing to settle mortgages with current prices,” Panetta notes. “A policy could insure up to $500,000 for a payout, but up to $1 million to rebuild. That’s a significant difference in value.”
### Planning Ahead
Although you can’t predict when disaster will strike, there are steps to enhance your preparedness. Two critical preparations can go a long way.
First, ensure you can swiftly access key details related to your mortgage, like loan specifics and contact information for your servicer. Previously, this would involve storing documents in a fireproof safe, but today, digital storage solutions like the cloud or secure apps are likely more convenient.
Also, maintain up-to-date documentation of your budget or regular expenses. These figures could be vital when filing a loss of use claim, given that payouts are determined by normal expenses.
Secondly—though it’s a tougher task—reassess your homeowners insurance. Mortgage contracts usually mandate insurance, but verifying that your coverage is adequate for rebuilding at market rates and confirming you have necessary disaster protection is crucial.
Taking these preparative measures can give you peace of mind, knowing that should the worst happen, you’ll be better positioned to recover.
