Can my bank keep the remaining balance of an insurance claim payment if my loan is current?

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Can my bank keep the remaining balance of an insurance claim payment if my loan is current?

We received an insurance check for $20,000 to repair a retaining wall in a rental property we own. We found someone to do the work and all work has been completed. There is $9,300 left and our bank won’t release the funds to us. They want us to pay down the mortgage. Can they do that?

Asked on April 19, 2012 under Real Estate Law, Iowa

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

They can only do this if something in your mortgage agreement itself allows them to. As a general proposition, the law does not allow a lender to retain borrower funds to pay down a loan faster than indicated by the loan documents; however, if there is some term or clause in the mortgage agreement or some other document you signed with the bank which permits or requires, such a clause would be enforceable. You should both examine these documents yourself and also ask your bank to explain the legal authority or basis under which they are doing this. If the bank cannot, will not, or you do not find their answer persuasive, you may need to sue the bank to get your funds (though in that case, weigh the cost of the lawsuit versus what you would gain--i.e. paying down a mortgage doesn't actually hurt you, and in fact increase your equity and reduces what you will pay in interest over the lifetime of the loan; unless you have a better use for the money, it may be best to let the bank apply it to your loan).


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