Buying or refinancing a house with a mortgage loan means you have to safeguard the lender as well. Mortgage companies typically make you purchase homeowner's insurance, title insurance, and, for certain types of loans, mortgage insurance. Don't count on the lender to waive any of these insurance requirements. If you finance a home, you will likely have to spend money upfront to waive an insurance requirement.
No Homeowner's Coverage, No Loan
When you finance a home, you will need a minimum amount of homeowner's insurance coverage. Lenders expect you to maintain sufficient coverage as long as you have a balance on the loan. They take this requirement so seriously that they require you to pay your premium in advance, at closing, and may directly collect payments from you to ensure your policy stays current. A typical homeowner's policy protects against losses that affect the home's value, such as vandalism, fire, smoke damage and other hazards. A standard policy doesn't cover earthquakes or floods, though. Your lender may require this extra coverage if your home is in a designated earthquake or flood zone.
Title Insurance That Protects Your Lender
Title insurance covers your lender's investment in the property. A title policy protects against fraudulent, unrecorded or erroneous information in your home's title chain. It kicks in when another party unexpectedly tries to enforce a claim to your home. A lender's policy is one type of title insurance. You buy a lender's policy to protect your lender if, indeed, another party can enforce its claim. Lenders typically want you to buy the policy at closing for an amount equal to the original loan, so the policy can at least pay off the loan balance.
Insuring the Mortgage for Your Lender
Mortgage insurance is another form of protection for mortgage lenders. They require either private mortgage insurance -- PMI -- or government mortgage insurance for a Federal Housing Administration loan. All FHA loans require mortgage insurance; but conventional loans typically require PMI when you finance more than 80 percent of the home value. The insurance provider reimburses the lender's losses if you default on the loan. Lenders may waive or cancel this type of insurance policy under certain circumstances.
Waiving or Cancelling Mortgage Insurance
Some lenders allow you to "waive" PMI at closing. They charge a flat fee or raise your interest rate to cover the PMI charges they incur for the policy, although they don't actually waive the need for it. Instead of having to pay for the PMI premium via installments each month, you pay for PMI another way. Your lender must cancel your PMI premiums after you pay your loan down to 78 percent of the original balance, although the coverage remains in effect. Lenders can cancel it sooner or later than this, depending on your payment history with the mortgage company.
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