Prior to your being able to close on a home purchase, you will be asked by your lender to provide them with a homeowner policy showing the mortgage holder as a lienholder on that property. They want to know their interest in the transaction will be honored in the event you have a claim which would adversely affect their financial position. Fortunately for you and your mortgage holder, built into the insurance policy is language like, “if a mortgagee is named in this policy, any loss payable will be paid to the mortgagee and you, as interests appear. If a payable loss is under $10,000 and is for repairs, however, payment may, at our discretion, be made to you only. If more than one mortgagee is named, the order of payment will be the same as the order or precedence of the mortgages. If we deny your claim, that denial will not apply to a valid claim of the mortgagee, if the mortgagee (a) notifies us of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware; (b) pays any premium due under this policy on demand if you have neglected to pay the premium; and (c) submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so.”(City Squire policy, Farm Bureau Insurance Company, mortgage clause, pp. 18-19 of 38)

Various states have provisions on how much insurance value can be required of you to pay when you take a mortgage on your home, and most times it is controlled by the value of structures on the property. For example, in the State of Idaho under its “Residential Mortgage Practices Act” Section 12.01,10-060 Prohibited Practices, Require Excessive Insurance–Requires a borrower to obtain or maintain fire insurance or hazard insurance in an amount that exceeds the replacement value of the improvements to the real estate.(3.29.10)

This is particularly useful for a property owner whose mortgage includes exposure to vast amounts of money due to land values. This makes it more in line with the concept of insuring only up to the amount of potential loss. In other words, you do not have to pay a premium for land worth $200,000 in a $400,000 debt when the structures are only worth $200,000. This could be an exceptional savings of premium over a 30 year mortgage.

It is worth checking with your realtor and potential lender when preparing to close on your dream home with the gurgling cool water trout stream flowing through the verdant forest with deer and elk stopping by to drink.