If you feel that the word "insurance" isn't a major part of your vocabulary, don't worry. That will change quickly when you purchase your first home. Two types of insurance you may need to carry are homeowner's insurance and mortgage insurance. While at first glance they may seem similar, they are two very different insurance animals.
While mortgage insurance protects the lender in case you default on your loan, homeowners insurance protects you in case your property gets damaged.
Home Insurance Type Differences
Homeowner's insurance provides coverage for damage to your property, like when your deranged cat accidentally knocks over a candle and sets the house on fire. It will also protect against things like theft and vandalism.
On the other hand, private mortgage insurance protects your mortgage lender in the event you default on your loan. Lenders typically require you to carry PMI if they deem you to be a high-risk borrower. Thus, homeowner's insurance protects you, the homeowner, while mortgage insurance protects the lender.
Homebuying Insurance Requirements
When you go to close on your home, you need to provide documentation that you have purchased an adequate amount of homeowner's insurance, usually in the form of the policy's declaration page. This document shows which coverages you carry and in what amount. You don't always need mortgage insurance, although if you cannot make a down payment of at least 20 percent of the loan amount, your lender will likely require you to carry it.
Mortgage Insurance Time Frame
The good news is that you don't necessarily have to keep paying for mortgage insurance for the entire length of the loan. Although your lender may require you to keep it for a minimum of two to five years, you can then look into eliminating it through refinancing or by getting a new appraisal. With the latter method, if the new appraised value has risen to the point where the amount you owe is now less than 80 percent of the value, you can get rid of the mortgage insurance. However, you'll want to keep homeowner's insurance for as long as you own the home.
Obtaining Insurance Coverage
In some instances, your lender may purchase the mortgage insurance for you, in which case you will likely be charged a higher loan interest rate than if you were to purchase the insurance.
With homeowner's insurance, you will bear the responsibility of obtaining coverage. You can get quotes from several insurance companies, although it is a good idea to start with the company that insures your vehicles. Many insurance companies offer a bulk discount if you insure your home and vehicles with them.
- Can You Lose Your Mortgage if Home Insurance Is Cancelled?
- How to Remove Mortgage Insurance From a Loan
- Piggyback Loan Vs. PMI
- Differences Between an FHA and a Non-FHA Home Loan
- Why Does My Property Insurance Have to Be Increased During Refinance?
- How do I Understand Homeowners Insurance?
- At What Stage Do You Look for Homeowners Insurance?
- How Is Mortgage Insurance Calculated?