Although purchasing a property necessitates purchasing insurance, there are several ways to avoid paying higher premiums and higher insurance rates.
If you’re buying a home for the first time, you probably have concerns about the many different types of insurance and additional homeowner costs you’ll need to pay. One of the most frequently asked questions is whether you need homeowners insurance, mortgage insurance, or a combination of both.
What Sets Mortgage Insurance Apart From Homeowners Insurance?
Quite simply, both these types of insurance coverage are important, but they are used to cover completely different situations. Mortgage insurance helps you pay back your lender when you default on payments, while homeowner’s insurance helps you to pay for any damages to your property, be it structural or property based, if your home/belongings are subject to damage/destruction. The main difference between mortgage insurance and homeowner’s insurance can be boiled down to who is protected in each case: Mortgage insurance mainly protects the lender and the lender’s investment into your home, while homeowner’s insurance largely protects the interest and property of the borrower and their possessions.
While homeowner’s insurance may be separate from mortgage insurance, the latter is generally charged along with your mortgage payments, which is something that you can check on.
Mortgage insurance is generally referred to as Private Mortgage Insurance (PMI), since you pay it to a private, independent insurance company that is selected by your lender.
Homeowner’s insurance is always a necessity if you own your own home, but Private Mortgage Insurance is not mandatory.
When Is Home Insurance Necessary?
Homeowners insurance is something you must have since it pays you if a claim is accepted. You’ll need assistance paying for necessary repairs if anything were to happen to your house. When you rip down ceiling tiles or drywall, you can discover hidden problems that require care. Even a little kitchen fire or a tree branch landing on your roof might result in excess of $10,000 in damages. The costs associated with home ownership can be quite significant and sometimes, entirely unexpected.
Most people are unaware that after finishing your mortgage payments, you might be able to terminate your homeowner’s insurance. However, doing so would be a gamble with extremely poor odds. For a $250K policy, homeowners insurance normally costs around $1500 per year. Your monthly premiums will, therefore, range somewhere from $100 to $200.
When Is Mortgage Insurance Necessary?
Not all buyers of homes will require PMI. You must pay this premium in order for your mortgage lender to receive payment in the event of your default. If a buyer’s down payment is less than 20% of the home’s sale price, they must pay PMI.
Depending on the size of your down payment, PMI payments might range from 0.3% to 1.5% of the loan balance – they typically make up 1% of the loan balance. As you may anticipate, you can negotiate a lower PMI rate if you make a sizable down payment.
When you buy your house, you might have to pay for this upfront or you might be able to finance it. However, you might have to pay the PMI throughout the duration of your mortgage payments if you are purchasing a home with a Federal Housing Administration (FHA) loan.
You won’t likely be required to pay a PMI charge if your down payment exceeded 20% of the home’s transaction price. That’s usually wonderful news for any new homeowner! However, it’s likely that as a first-time house buyers, a large majority of people do not have a down payment of more than 20% saved up.
Once your property reaches 20% equity, though, you might be able to renegotiate the conditions of your PMI and reduce the payments or stop making them entirely.
Do PMI Premiums Always Have To Be Paid?
PMI fees are not always necessary to pay! Additionally, you have the option to opt out of future payments once you have paid off 20% of the home’s value.
So, for instance, if your house sold for $500K and you put down $50K, you would now own 20% outright and your house would have $100K in equity. Over the years, you would have paid another $50K in mortgage payments. In general, if you renegotiate with your lender at this stage, you can cease paying PMI.
How can you avoid paying PMI?
- SAVE, SAVE, SAVE!! – If you give yourself enough time to save up enough for a sizable down payment, it can help you save a lot of money in the form of PMI payments over the course of a few years
- Request your lender to pay – Lender-Paid Mortgage Insurance (LMPI) can be paid by the lender towards your mortgage insurance, however it could cause you to have a higher mortgage rate overall
- Structure a piggybank mortgage – Often referred to as an 80-10-10 split, wherein 80% goes towards your first mortgage, 10% to your second mortgage, and 10% to your down payment, this deal helps you out by structuring your overall mortgage as two instead of one
- Identify lenders who have their own Mortgage Insurance Programs – a few lenders in the market will offer you low down payment options without PMI attached. This helps a large number of people – first-time homeowners, low-income buyers, or people from certain professions like teachers and doctors
- Use a Veteran’s Affairs (VA) loan: Available to US veterans through the Department of Veteran’s Affairs, you could qualify to have your mortgage paid, without having to get a down payment or PMI!
Is homeowners insurance included in my mortgage?
Every monthly mortgage payment that you make generally contributes a portion of funds towards your escrow account. Your lender manages this escrow account and uses it to pay your homeowner’s insurance, property taxes, and such, annually. Double-check to make sure that the correct information is provided in the mortgagee clause that is listed on your homeowner’s insurance policy so that your property insurer knows where to send your homeowner’s insurance premium bill., You could run the risk of your homeowners insurance being canceled for nonpayment, without this information listed on your insurance policy!