HomeInsurance Types Needed for your New Home
by Michael W. Licamele
When buying a home for the first time, many consumers are utterly confusedby the numerous types of insurance that they are required to purchase. Ata typical closing in Massachusetts, a home buyer could pay for homeownersinsurance, mortgage insurance, flood insurance, title insurance, mortgagecredit life insurance and even earthquake insurance. In addition to tryingto obtain the best coverage for the least cost, a buyer must know when andif they need each coverage.
Most consumers are familiar with homeowners insurance, which is alsocalled hazard, fire or property/casualty insurance. This type of insuranceprotects the homeowner against physical perils such as fires, falling trees,windstorms and other disasters. In addition, most policies also providegeneral liability protection in case of accidents on your property. Forexample, if a neighbor came to visit, tripped on your broken front stepand then went home and sued you, your homeowners policy would cover you.
One disaster that homeowners insurance policies do not cover is a flood.Because floods have caused such devastation in the past, private insurancecompanies stopped offering coverage. Many years ago, the federal governmentinstituted the National Flood Insurance Program to assist homeowners withflood problems. Maps were drawn of flood zones in the country. These mapsare available at local town halls. If your home is located in one of thesezones and you are obtaining a mortgage, you must# purchase flood insurancefrom the federal government.
Another disaster that homeowners insurance does not cover is earthquakedamage. While easterners may laugh at Californians who deal with earthquakethreats daily, there have been numerous reports over the past several yearsof small earthquakes in the northeast United States. At present, this typeof coverage is not required to obtain a mortgage. In addition, no damagehas been reported due to earthquakes in the area. This is one peril thatmay become an issue in the future.
The second and most confusing category of insurance for home buyers ismortgage insurance. Mortgage insurance does not insure you, the homeowner,rather, it guarantees a portion of the mortgage to the lender in the eventthat the borrower defaults. This type of insurance is required when a homebuyer is making a downpayment of less than 20% of the purchase price ofa home. It is also required when a homeowner is refinancing and the amountof the mortgage loan exceeds 80% of the value of the property.
If mortgage insurance does not insure home buyers, the obvious questionis why are they required to pay for it. Without this outside coverage, mortgagelenders would not be willing or able to offer mortgage loans with down paymentsof less than 20%. For example, mortgage insurance coverage has now allowedmortgage lenders to offer some mortgage loans with a down payment as lowas 3%.
Because mortgage insurance coverage is an extra expense, and becauseobtaining the coverage requires two sets of underwriting approvals, manylenders have begun offering low downpayment loans with no mortgage insurancerequirement. In exchange, however, borrowers must pay a higher interestrate on their mortgage. An experienced mortgage professional can help youdetermine which option is best for your needs.
The most important aspect of mortgage insurance that consumers must rememberis that the coverage is not required for the life of the loan. In fact,you can remove your mortgage insurance coverage and stop paying the premiumsany time after the second year you have at least 20% equity in your home.This equity can come from either an increase in market value or from payingdown the loan. No lender will ever remove the coverage for you. You mustmake the effort to obtain a new appraisal at your expense and request thatthe coverage be terminated.
Many consumers confuse the mortgage insurance described above with mortgagecredit life insurance. Mortgage credit life insurance programs charge asmall premium each month and will pay off your mortgage loan in full ifyou die.
The last type of coverage that a home buyer must purchase is title insurance.Title insurance provides protection in the event that a flaw in the titleis detected after the property has been bought. While attorneys conducta title search to make sure that a seller is giving a home buyer a "marketabletitle," there are many instances in which small but expensive titleissues may arise after closing. Lenders will require that home buyers obtaincoverage for the mortgage amount, but additional coverage for the home buyers'equity is also available and highly recommended. The good news about titleinsurance is that it is a one-time charge with no annual premium.
One of the frustrating aspects of the home buying process is that consumershave little or no control over what types of insurance are required whenthey purchase their home. Homeowners insurance is always required in anamount equal to at least the loan amount (or for full replacement cost,which is extremely common). If your property is located in a flood zone,you will also be required to obtain flood insurance as well. At present,earthquake coverage is not required. Also, mortgage credit life insuranceis never required and is simply an option for your financial planning. Finally,title insurance is required, but is only a one-time charge as stated above.
With a firm grasp of the many types of insurance, home buyers can confidentlyobtain the coverage they require, avoid programs that are not in their interest,and reduce their costs over the life of their mortgage loan term.