After letting his homeowner’s insurance lapse, 85-yr-old sees his house payment jump 118%
One of the major costs in owning a home is the property taxes and homeowner’s insurance. You’ve got to make sure these are paid up, otherwise you could find yourself faced with expensive problems.
And I’m not even talking about the dangers of your house burning down during a lapse in your insurance coverage.
I’m talking about the needless costs a person can incur when their mortgage company finds out the taxes or insurance have not been paid. The bank that is owed your mortgage debt, and who has their stake in your home, can heavily penalize their borrowers for not paying these bills. I’ve seen it with my clients, and brother it is expensive.
Your house is their collateral, and they do not like to find out their collateral is not insured. Banks know the importance of insurance. And they really don’t like it when some taxing body puts a lien on their collateral.
I’ve never seen mortgage companies impose actual penalty fees in situations like this. But I have seen them pay the taxes or the homeowner’s insurance, and then extract huge sums of money from the borrower for reimbursement. When the bank has to pay your bills, its bottom line is violently disturbed. It’s like throwing a bucket of ice water on a hornet’s nest, and the reaction is similar.
When a mortgage company pays your tax or insurance bill, it will usually set up escrow accounts for these things to make sure they never go unpaid again. You will now have to fund these accounts every month as part of your monthly house payment. When this happens, the increase in the house payment can be huge. Because in addition to the current year’s taxes or insurance you have to pay toward each month, you must reimburse the bank for whatever it paid on your behalf. If you can’t handle this huge spike in your house payment, the effects can be disastrous.
Most recently, this happened to a client of mine named John. John is an 85 year old man who lives alone. He gets social security of $1,200 every month. That’s it. His mortgage payment was $500, and he paid the relatively small tax and insurance bills himself. The problem was that John had been short of money when his insurance bill came in, and he didn’t pay the bill until about five months later. By that time, his mortgage company had arranged for insurance coverage on the house, and set up an escrow account for John to pay into every month. John’s payment jumped from $500 to $1,089! That’s only $11 less than his monthly income. That was four months before he called us. He’d missed all four new payments, he owed the mortgage company a total of $7,000, and they had initiated foreclosure.
Now, if you noticed the numbers, you might be asking why John owed $7,000 if he only missed 4 payments at $1,089 apiece, which equals only $4,356.
That’s because the insurance policy put in place by the mortgage company cost $1,600 for only five months of coverage! (John’s policy cost only $1,100 for the entire year.) In a situation like this, a mortgage company will often get a “sight/unseen” insurance policy. This means the insurance company has not inspected the property, so they charge more because they don’t know what they are insuring. Also, these policies usually carry no deductible, which also drives up the cost for coverage.
John had about $50,000 in equity in his house and he stood to lose it all if the foreclosure went through. To stop the foreclosure, John would need to come up with the entire seven grand, or file for bankruptcy. And the mortgage company told us–in no uncertain terms–that the escrow account would be there for the life of the loan. There was no chance in hell of cancelling them and letting John pay the insurance himself. These were some angry hornets indeed. So even after the arrears were paid back, John’s monthly payment would be significantly higher. All because he didn’t pay an $1,100 insurance bill.
“John do your kids know what’s going on with the house?” I asked him.
“No,” he said.
“I think you’re going to have to tell them.”