Homeowner's Insurance - Why Do We Need It?
March 6, 2021
Homeowner’s insurance provides coverage to repair or rebuild your home, in the instances that are spelled out in the policy. Also known as hazard insurance, homeowner’s insurance typically covers damages to the house that occur from fire, smoke, theft, vandalism, and bad weather such as lightning, wind, or hail. Most policies also cover things inside in the home, such as furniture, electronics, and other possessions. They also cover the medical expenses and legal fees if people other than those living in the home are injured on the property.
Homeowner’s Insurance vs. Mortgage Insurance
Securing a homeowner’s insurance policy is required by your lender, but it is important that you do not confuse this policy with your mortgage insurance. While it is common to mix the two up, they are not the same! Homeowner’s insurance protects the borrower, while mortgage insurance protects the lender.
In the case of FHA loans, a monthly mortgage insurance premium (MIP) is paid along with the Up-front Mortgage Insurance Premium (UFMIP). In addition to funding the FHA, this mortgage insurance is there to protect FHA-approved lenders in case the borrower cannot repay the loan.
Similarly, conventional loans require private mortgage insurance (PMI). PMI is charged when borrowers make less than a 20% down payment on a conventional loan, making it riskier on the lender. The private mortgage insurance typically costs between 0.5% and 1% and is paid monthly until the borrower pays down enough on the principal amount - generally 20%, when the loan is no longer considered high-risk).
Never Assume
Unless specifically spelled out in your policy, do not assume that you are covered. Always keep in mind that you cannot claim coverage for issues that are not specified in your policy. This includes floods and earthquakes, but it may also apply to water damage from sewer pipes or storm drains, etc. Remember that flood and earthquake insurance is always sold separately. If you buy a home in an area designated as a flood zone or one that is prone to earthquakes, your lender may require that you purchase these additional policies.
Read and re-read your insurance policy so you know exactly what you are covered for. The wording of your agreement may be complicated, so take the time to ask your insurance agent as many questions as you have.
Costs and Coverage
The cost of your homeowner’s insurance policy varies based on several factors. First, there is the location of your home. This includes a bunch of factors within itself, such as how far your home is from a fire station, or how close it is to a body of water. Expect to pay a higher premium if you live in a high-crime neighborhood.
The age of your home will also affect the amount you pay. If you are purchasing a home built over 20 years ago, it stands to reason that there will be some upcoming claims for renovation. On the other hand, big upgrades such as a new roof or plumbing can bring down the cost of insurance.
A big factor that affects your insurance cost is the coverage you select. You can choose to have more extensive coverage in your policy if you have more valuables in your home, or to protect yourself from liability issues, but this will understandably raise your premium. The premium also varies based on the deductible you select. A higher deductible could reduce your premium costs up to 25%.
Finally, your insurance premium might look different from someone with the exact same policy because of your credit history. While a provider cannot refuse a homeowner, coverage based on their credit, they might offer a discount on the policy if their credit score is high enough. This gives borrowers one more reason to work on their credit when getting ready to buy a home.
------------------------------
RELATED VIDEOS:
Understand the Reasons for Private Mortgage Insurance
Carefully Read Your Closing Disclosure
Buying a Home With a Co-Borrower
FHA Loan Articles
November 21, 2024The dream of homeownership is with some from a young age. But in an uncertain housing market, some grapple with the question: Is buying a home the right move for me?
While renting offers relocation flexibility and lower upfront costs, homeownership provides a wealth of financial and personal benefits.
November 20, 2024Refinancing your mortgage offers a way to cash in on your home equity, potentially reduce your interest rate, or modify your loan term. Borrowers ready to consider have options including FHA loans and conventional loans.
While both provide avenues for refinancing, each loan type may be best for specific needs and financial circumstances. What are the differences between FHA and conventional refinance options?
November 14, 2024The home you want to buy might seem perfect, or it may have a few flaws that are acceptable in the grand scheme of things. But what about issues you can’t spot just by walking through the property a few times? A home inspection provides an unbiased, expert assessment of the property's condition, uncovering potential issues that might not be noticeable to the untrained observer.
November 12, 2024Escrow is an important feature of most typical FHA loans. An escrow account is a third-party account where borrowers deposit funds designated for property taxes and other uses. Requirements to use escrow accounts typically stems from a need to protect all parties involved in the transaction
November 2, 2024When it’s time to consider buying a home, the Federal Housing Administration (FHA) offers two popular options. One is the traditional FHA purchase loan many use to buy a house in the suburbs. But not everyone wants to buy an existing property. Some want more control over the design and configuration of the home.
The other FHA construction loan option, the one-time close mortgage, comes in here. This option is for those who want to approve floor plans, have a say in the types of materials used to build the home and choose its features.
