If your house goes up in flames, does your obligation to pay your mortgage?
Every time you buy a house or refinance you are bound by the promissory note to make monthly payments on the property. Even a total loss does not relieve buyers of this obligation. Also, the mortgage requires the borrower to give a prompt notice to both the lender and the insurance carrier in the event of a loss.
For borrowers who plan to rebuild, insurance proceeds are generally held in escrow by the lender or loan servicer and disbursed according to a schedule as construction progresses. Sometimes that tends to lead to tension, usually between the homeowner and the insurance company because they decide to dispute the extent of the loss. Tension could also occur between the homeowner and the mortgage lender over the disbursement schedule. An independent adjuster can help smooth things out with the insurance company, and an attorney might be able to help borrowers negotiate with the lender.
A standard homeowners insurance policy will also cover the replacement of personal belongings as well as additional living expenses if it is not possible to live in the house that has been extensively damaged. But jumbo borrowers, or those with substantial savings or low mortgage balances, ma opt to pay off the mortgage directly.
If the homeowner does not want to rebuild or just wants to satisfy the mortgage, they can pay the mortgage off in full, and the insurance would release the insurance proceeds back to them. Some lenders may allow you to refinance by doing a home- equity loan on the land or what residual structure remains.
Borrowers who live in a development with an HOA may also be required by the association to rebuild the house, as well as some local governments.
