YOU ASK:

What is hazard insurance on a mortgage?

WE ANSWER:

Hazard insurance (or also known as homeowners insurance) protects against loss or damage to the home caused by a covered hazard.

When you have a mortgage, it is advisable that you buy hazard insurance up to the current loan amount. That way, when something damages your home, you will have financial assistance and you can recover any expenses related to the damage.

This is one way of protecting your mortgage, since, if your home is destroyed, your mortgage payments and your equity on the home will be worth very little. Hazard insurance covers natural disasters such as earthquake, tornado or hurricane, as well as events such as riots, vandalism, acts of terrorism or war and fire. It may also protect the items inside the home against theft.

When your home is totally destroyed, the insurance company may, depending on the terms and conditions of the policy, pay for the replacement value of the home or the home's purchase price.

Commonly, the lender will require you to take a hazard insurance policy on your mortgaged house. The loan will not be approved unless you do so. When your house has sustained significant damage, you may be more likely to default on the mortgage. The bank will require you to insure for up to the mortgage amount so that you are not underinsured. This way, the bank is assured that their investment is covered regardless of the amount or extent of your coverage.

If you don't have hazard insurance, your bank may also agree to purchase the mortgage insurance for you. However, it will charge you with a higher interest rate.

As for the hazards that are being covered, you should check your policy or ask your insurance broker for the details on the hazards included in the policy. Comprehensive hazard insurance will also cover not just for physical damages but for liability as well.

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