Whether you are buying a home or refinancing your home loan, insurance is important to understand and consider when you’re planning your financial future. Many first-time homebuyers can confuse private mortgage insurance from homeowners insurance, and title insurance. We outline the differences so that you know what to expect when it comes time to refinance or buy a home.
What is Homeowners Insurance?
Homeowners insurance (sometimes referred to as hazard insurance) policy covers damages to your home and your belongings, and accidents on your property, as outlined in your policy. In contrast to private mortgage insurance (PMI), homeowners insurance is designed to protect you as the homeowner.
Homeowners insurance is not always mandatory. For example, if you have paid off your entire mortgage, you are not required to have homeowners insurance. However, it is extremely encouraged to avoid risking what is often the largest expenditure of your life.
In Florida, homeowners insurance does not cover damage from floods and sinkholes. Homeowners will need to purchase additional coverage for these natural disasters.
What is Private Mortgage Insurance?
Mortgage insurance that is provided by a private mortgage company is referred to as private mortgage insurance (PMI). PMI is different from homeowners insurance because it protects the lender, not the homeowner. If at any point, a customer is unable to make loan payments, PMI protects lenders from any defaults on the loan.
As the borrower, you will be responsible for paying the premiums of the insurance until you are eligible to cancel PMI. Premiums are most commonly paid monthly, but can also be paid for upfront with your down payment.
For Conventional loans, borrowers who put down less than a 20% down payment are required to acquire private mortgage insurance. If you are refinancing your home loan and have less than 20% equity in your home, you will also be required to acquire mortgage insurance.
When Can I Cancel My PMI?
When you acquire private mortgage insurance, you will be told how long it will take to pay your loan sufficiently before you are able to cancel your mortgage insurance.
If you obtained your loan after July 29, 1999, you can request cancellation of PMI when your loan-to-value (LTV) reaches 80%. Your LTV is calculated by dividing your loan amount by the purchase price or appraised value of your home. To terminate your PMI, you must prove the following to your lender:
- Good payment history
- That the property value has not decreased since purchase
- No liens against your property
Lenders are required by the Homeowner’s Protection Act of 1998 to cancel PMI at 78% LTV if the loan is current or has reached the midpoint of the payoff.
To learn more about your options to refinance or cancel your PMI, contact our loan experts at Chris Doering Mortgage today.
What is Title Insurance?
A title insurance policy protects a lender and homeowner against any loss resulting from a title error or dispute, such as fraud, forgery, and improperly recorded documents. All mortgage lenders require lender’s coverage for an amount equal to the loan and it lasts until the loan is repaid. As with mortgage insurance, it protects the lender but the borrower pays the premium at closing. An owner’s policy is also typically issued simultaneously at closing to protect the homeowner.
Start the Home Buying Process with Chris Doering Mortgage
There are many details to consider when purchasing a home. At Chris Doering Mortgage, we’re dedicated to helping our customers through every single step of the home buying process. We strive to educate and empower each homebuyer to ensure they receive a loan that makes sense for them and their future.
If you are thinking about purchasing a home or would like to learn more about your options, contact our team today.