Do you need homeowners insurance for a HELOC?
Yes. Every HELOC lender requires active homeowners insurance before closing and for the life of the line.
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Do you need homeowners insurance for a HELOC?
Yes, you need homeowners insurance for a HELOC: every HELOC lender requires active coverage before closing and for the life of the line, with the lender added to your policy as a lienholder. In a FEMA flood zone, flood insurance is required too. If coverage lapses, the lender can buy expensive force-placed insurance and charge you for it.
On this page
If coverage is hard to get
In wildfire and coastal areas, insurers have pulled back. Line up a policy, including a state plan if needed, before you apply, since the lender will verify it before closing.
Use a free calculator, or get your HELOC rate from Shawn.
Insurance counts in your ratio
Your premium is part of your monthly housing cost, so a big increase can raise your debt-to-income ratio.
What the lender needs from your policy
- Dwelling coverage at least equal to the lesser of the replacement cost or the total loan amounts, per the lender's rules.
- The lender named as mortgagee or loss payee, in second position behind your first mortgage lender.
- A deductible within the lender's limits, often no more than 5% of the dwelling coverage.
- Proof the premium is paid.
California's insurance market
Several large insurers have stopped writing new policies or renewing some existing ones in parts of California, especially near wildland areas. The California FAIR Plan provides fire coverage as a last resort, usually paired with a "difference in conditions" policy for other risks. Lenders generally accept the FAIR Plan plus a companion policy. Shop through an independent agent who can quote several carriers. HELOCs in California.
If you file a claim
Large claim checks are often made out to you and your lenders. The lender endorses the check and may release funds in stages as repairs are done. Tell both lenders promptly; it speeds up the endorsements.
Force-placed insurance
If your coverage lapses, the lender can buy a policy to protect its interest and charge you. These policies often cost several times more and protect only the lender. Reinstating your own coverage and sending proof ends the force-placed policy, usually with a refund for the unused period.
Example
A homeowner in a wildfire-prone canyon gets a nonrenewal notice in the middle of a HELOC application. Her agent places her with the California FAIR Plan for fire and a companion policy for other risks. She sends both declarations pages to the lender, which accepts them, and the line closes a week later.
Checklist
- Confirm coverage meets the lender's minimum.
- Add the HELOC lender as second mortgagee.
- Set renewal reminders.
Also asked
Do I need flood insurance for a HELOC?
Only if the home is in a FEMA special flood hazard area. There, federal rules require flood insurance for the HELOC, and the lender orders a flood determination during processing.
Does my HELOC lender pay my insurance?
No. Most HELOCs don't have an escrow account. You keep paying your premium directly or through your first mortgage's escrow.
Is earthquake insurance required for a HELOC?
Usually not. Most HELOC lenders don't require earthquake insurance, even in California. Whether to buy it is your call; earthquake coverage typically has a high deductible.
What if my insurer drops me during the HELOC?
Get replacement homeowners coverage before the old policy ends and send the HELOC lender proof. A lapse can trigger force-placed insurance, which often costs several times more and protects only the lender.
Does the HELOC lender need to be on my policy?
Yes. Your HELOC lender must be named on your homeowners policy as a mortgagee or loss payee, in second position behind your first mortgage lender, so claim checks for major damage include it.
Does a HELOC lender require replacement-cost coverage?
Most require dwelling coverage of at least the replacement cost or the combined loan balances, whichever their rules specify.
Does my HELOC lender need to know if I change insurers?
Yes. Send the new declarations page to your HELOC lender as well as your first-mortgage servicer, with both listed as mortgagees. Many force-placed insurance notices are simply because the lender never received proof of the new policy.
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Sources
Official sources behind this guide.
- What is the difference between a home equity loan and a HELOC? · Consumer Financial Protection Bureau
- What you should know about home equity lines of credit (booklet, PDF) · Consumer Financial Protection Bureau
- Publication 936, Home Mortgage Interest Deduction · Internal Revenue Service