As you head down the path toward buying a new home, you’ll hear a whole new dictionary of terms being tossed around. When it comes to insurance, the two most common types you’ll hear about are mortgage and homeowners insurance.
It might be easy to think the two are one and the same, but that is not the case. They are two very different things, but both may be required by the lender.
Mortgage insurance
If you hear your real estate agent or lender talk about private mortgage insurance, often referred to as PMI, they’re referring to a policy that protects the lender if you stop making your monthly payments.
You’re often required to pay PMI if your down payment is less than 20 percent, and it will typically cost you 0.5 to 1 percent of the price of the home you’re buying.
Once the loan-to-value ratio on your house is 78 percent or lower, your PMI will be automatically canceled. Normally, you’ll make your PMI payments along with your mortgage and escrow. It will all be lumped together in one payment.
Homeowners insurance
Once you’ve bought your home, you’ll want to financially protect yourself against theft and most disasters, and that’s why you get homeowners insurance (though flood and earthquake protection requires separate, individual insurance). You’ll also want to be covered if anyone gets hurt so that you’re not held liable for any damage that occurs while other people are at your house. Your homeowners insurance even covers damage or injuries caused by your pet.
The typical policy will cover the structure of your home (except damage caused by flood, earthquake or day-to-day wear), your personal belongings, liability protection and living expenses should you have to relocate to temporary housing if disaster strikes your home.
Most lenders will require homeowners insurance even if you’re already paying PMI. Homeowners insurance protects the lender if the house, which they have also put their money into, were to be damaged in a disaster.
Once your mortgage is paid off, you will no longer be required to hold homeowners insurance, but without it, you would be putting your investment at risk.
A mortgage loan officer can answer any additional questions you have about the difference between PMI and homeowners insurance. A lender can also help you take advantage of today’s attractive mortgage loan interest rates and explain which types of insurance you should invest in.
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