May 20, 2021
No matter what kind of home loan you apply for, you will have issues related to mortgage insurance to brush up on. Are you a first-time homebuyer? Do you have experience buying a home? In either case, there are things to remember.
Some new to buying a home assume (mistakenly) that some kinds of insurance are universal.
Then there are those who confuse mortgage insurance with homeowner’s insurance. This is not an unusual mistake to make, but it can cost you. What do you need to know about insurance issues? The first thing involves who is protected under the insurance plan.
Mortgage Insurance Premiums (MIP)
If you want to avoid paying for mortgage insurance on a conventional loan, you are generally required to put a whopping 20% down.
When it comes to FHA home loans, this mortgage insurance requires an Up-Front Mortgage Insurance Premium or UFMIP, and then monthly mortgage insurance premiums are paid for either 11 years or the lifetime of the loan depending on several factors including how much of a down payment you make.
These insurance payments do not protect the borrower against theft, property damage, etc. Mortgage Insurance Premiums on FHA mortgages protect the lender against loss should you default on your home loan.
This type of mortgage insurance is NOT payable to the borrower. It protects the lender, borrowers do not benefit in any way. This insurance is required but should not be confused with homeowner insurance which is intended as a consumer product to protect the investment in a home.
Homeowner’s Insurance
Homeowner’s insurance is what you must shop for to get coverage for your home and the things inside it. Like other types of insurance, these coverages are not automatic.
In a similar fashion to car insurance or medical insurance, you will need to find a homeowner’s policy, choose your coverage preferences, and establish deductibles where applicable. Homeowner insurance does not protect your lender, it protects you. But there are caveats (see below).
Homeowner Insurance Only Covers What Your Policy Says It Covers
What do we mean by this? Basically, if your homeowner insurance policy does not specifically mention floods, forest fires, earthquakes, or other natural disasters, you are NOT covered against those problems.
Earthquake, mudslide, and flood insurance, for example, have very specific coverage requirements and must be described by name in your policy.
Some borrowers do not realize that being protected against ordinary “water damage” is not the same as having flood insurance and you will not be compensated for rising water damage unless your policy mentions it by name.
Is that a technicality? Perhaps. But that does not change the fact that this is how the industry operates. If you do not have a specific natural disaster named in your policy, you do not have coverage protecting you from that disaster.
Ask an insurance professional or a lending professional what types of homeowner’s insurance might be best for the region you are living in. The answers could help you make more informed choices about your coverages and how to set them.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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