If you are looking into buying a home, then you will be dealing with many different kinds of insurance packages. These insurances cannot be confused, as they are all separate charges that must be paid in order to stay out of legal hot water. Most insurance packages are also good investments unless you have a store of millions of dollars to handle unexpected home emergencies out of pocket. Let’s take a look at two insurance types that are often confused for each other:Â homeowners insurance vs mortgage insurance.
What is homeowners insurance?
Homeowners insurance is an insurance package that protects the owner of the home against damages to the home. There are many different kinds of homeowners insurance packages, most of them customized to the individual needs of the home that is being covered. Just as with automobile insurance, there are certain minimums of homeowners insurance that must be maintained by an owner in order to stay in compliance with legal standards. These minimums may vary depending on the state that the home is in.
What are the different types of homeowners insurance?
The more expensive your property, the more specialized your homeowners insurance packages will be. The minimum homeowners insurance package that is usually required to stay in legal compliance is equivalent to an emergency medical insurance plan that covers only the most debilitating and serious conditions in the body. The state and your lender want to know that they will not lose all value in the home if a tornado or an earthquake hits the property. Because most homeowners do not have the money to completely rebuild the property, this emergency level insurance is implemented as a minimum to ensure that someone pays for damages that would otherwise cause a total loss or significant structural problems in a home. However, there are many other levels of insurance that a home buyer may invest in.
Special weather insurance packages may be required in areas of high risk such as California. In places like Malibu, the state government requires flood insurance and fire insurance on every home. These weather conditions are an almost annual occurrence along the shoreline, and no lender will underwrite a loan in that state without this type of insurance. The state government also has an interest in maintaining property in high-value areas, thus the special requirement.
Homeowners may also invest in homeowners insurance to protect assets that are stored in the home. Investment art, expensive furniture, and even model cars that are primarily housed in garages may require a special kind of homeowners insurance that is meant specifically for home assets.
The last major kind of homeowners insurance includes liability insurance for accidents that occur in the home. Most of the basic homeowners insurance packages do not fully cover accidents that are the fault of the homeowner or guests that are inside the home. This insurance can protect a homeowner who uses a home for business purposes or frequent social events.
Why should I have homeowners insurance?
Aside from the legal requirement for basic homeowners insurance, higher levels of insurance may be a good investment in the home. Homes that are used for business should definitely consider higher forms of insurance in order to protect those business interests.
What is mortgage insurance?
Mortgage insurance is often confused with homeowners insurance because people equate homeownership with a mortgage. However, the ownership of a home is not the same as the mortgage itself; there are many cases of people purchasing homes without mortgages in all cash transactions. Mortgage insurance is a special kind of insurance that protects the lender from losing money in the case of buyer default.
If you are negotiating a loan package with a lender, that lender may be required to invoke mortgage insurance into the agreement. If you are considering a conventional or jumbo loan that is not backed by a government entity, you may be required to pay a private mortgage insurance (PMI) if you are not putting at least 20 percent of the total value of the home down in cash as a down payment. Loans from government-sponsored entities such as the Federal Housing Administration and the United States Department of Veterans Affairs may be able to waive this PMI payment; however, it is often a legal requirement as well as an industry standard practice from lenders across the board.
Why should I have mortgage insurance?
If you are putting down less than 20 percent on your home, then mortgage insurance may be a legal requirement that you cannot avoid. In the case of certain lenders, you may also have to negotiate a mortgage insurance package based on your credit score or credit history. In general, borrowers with lower credit scores will be more likely to pay a mortgage insurance.
In the case of a default, you may gain some legal advantage because the lender will not have to come after you to make restitution on the value of the mortgage. However, mortgage insurance should be avoided if it is at all possible.
Mortgage insurance usually adds from one to two percent to the total value of the loan.
2 Point Highlight
Because most homeowners do not have the money to completely rebuild the property, this emergency level insurance is implemented as a minimum to ensure that someone pays for damages that would otherwise cause a total loss or significant structural problems in a home.
If you are considering a conventional or jumbo loan that is not backed by a government entity, you may be required to pay a private mortgage insurance (PMI) if you are not putting at least 20 percent of the total value of the home down in cash as a down payment.
