A devastating storm rips through your community. Your home suffers significant damage. The home insurance agent tells you that repairs are just too expensive. Instead, it wants to help you rebuild your home. Or, it wants to pay you the maximum allowable under the policy. The insurer cuts a check for the work necessary, up to your home’s upper coverage limit. Who gets that check?

Understanding Your Mortgage

Your mortgage company holds the title of your home. That is, while you are paying down your loan, the lender has a vested interest in your home. If you fail to make payments on your loan, the lender can force the sale of the home to recoup its losses.

The same applies to situations like this. If the home is no longer safe to live in, you still owe the lender money. That home insurance claim check may help cover what you owe. Therefore, you can pay off a loan, and then proceed with rebuilding. You can alleviate the cost burden by not having to pay for both losses.

Rebuilding or Not?

One of the first decisions here is to determine if you can or should rebuild the home. The insurance company generally wants to see you make repairs or rebuild. That is why most insurance policies have enough coverage to cover the cost to rebuild a home. Remember, this cost is often higher than what you pay to buy the home outright.

In some situations, you may not be able to rebuild. For example, the area may no longer be safe. Or, the amount you receive from your insurer for the damage is not enough to cover your costs. In this situation, you may not have to pay to rebuild the home.

Who Gets Paid from the Insurer?

The home’s lender may hold onto the insurance claim check until you complete the rebuilding. This ensures the technicians do the work and restore the value of the home. However, if you decide not to rebuild, the lender may petition for the funds to cover the mortgage debt you owe. For example, if the insurance company cuts a check to you for $125,000 and you owe $50,000 on your mortgage, the lender will need you to use the funds from the claim to pay off that $50,000. You then receive the remaining $75,000. You might be able to use the money to go towards new accommodation elsewhere.

Most often, this is not a delayed process. It depends on the terms written into your mortgage and your home insurance policy. Contact your agent to find out if you should increase your coverage to minimize this risk.