Insurance 101: What You’ll Need for Homeownership
One of the slightly less glamorous but necessary parts of home buying is shopping for insurance. There are several types of insurance required of all homebuyers and then a few optional types depending on your particular circumstances. With so many things to consider during the buying process, determining which types of insurance you need might seem overwhelming – but don’t fret! Read on to see what’s required and get the details on other types of insurance you may want to consider before signing the title to your new home.
Just as you must have car insurance to protect your vehicle, you’ll also be required to obtain homeowners insurance to protect your new house. This form of insurance could also be called hazard insurance, and your mortgage lender will require you to have it in place prior to closing day. In most cases, you’ll pay your home insurance premium directly to your escrow account along with your mortgage payment.
Homeowners insurance is your lifeline in the event of property loss due to fire, theft or other catastrophic damage. It’s meant to help you replace your property to its prior condition if an unfortunate event were to happen, so it’s important to work with your insurance company to ensure you have enough coverage when selecting a plan. Below are some commonly claimed items according ValuePenguin, that homeowners insurance may cover.
This is another type of insurance required by your lender, though specific regulations will vary by state. It’s issued for the amount of your mortgage and will remain in effect until your loan is fully paid. In addition to the lender’s title insurance, you can also obtain owner’s title insurance for your home, which will remain in effect as long as you own the property.
Why Title Insurance?
The purpose of title insurance is to protect the policyholder against claims regarding rightful ownership of property. Essentially, it is meant to protect the lender to ensure title enforceability.
Private mortgage insurance
There are different loan types to choose from when applying for a mortgage, so the odds are in your favor that you’ll find one that fits your individual needs. If your nest egg is still on the small side, there are some great options that don’t require you to put a large down payment on a home. However, you should know that when you put less than 20% down, you may be required to pay private mortgage insurance (PMI), or mortgage insurance (MI). Usually, this monthly premium will be included in your mortgage payment.
MI protects lenders against the risk of default by borrowers. If you’re a homebuyer who doesn’t have a full 20% down payment, your lender will be happy to work with you to obtain a mortgage – but in most cases, they’ll expect you to cover the mortgage insurance premium to protect their investment.
Other types of insurance to consider
In addition to the essential types of insurance homebuyers should have, there are some specialty insurances that might be beneficial for your situation.
In some areas, you may be required to purchase this type of insurance (i.e., if you live in a designated flood zone). However, you may want to consider it even if it’s not required, since flood damage isn’t covered by your standard homeowners insurance policy.
Does the home have a basement?
It’s also a good idea to include a water backup coverage endorsement on your homeowners insurance policy, as this will protect you in the event a sewer or drain blockage floods your basement area.
Earthquakes are one of the big ‘exceptions’ to a standard homeowners insurance policy. If you live in an area where earthquakes are prevalent, this is something you’ll want to consider adding as an endorsement to your policy. The cost varies depending on your location and likelihood of facing an earthquake, but it’s certainly worth a conversation with your insurance agent when choosing your policy.
Personal property insurance
While your homeowners insurance will provide some coverage for personal belongings within your home, you may want to purchase additional coverage for items not specifically covered by your standard policy. This would include things like art, collectibles, jewelry or firearms.
Though not a form of insurance, a home warranty is a contract that provides service repairs for home systems and appliances that fail. It is a completely optional purchase, but it can protect you from facing steep bills if your HVAC system suddenly stops working, for example.
Most homes come with at least a one-year warranty, but if the home you’re planning to buy does not, it’s worth asking the seller to provide one.
No matter which type of insurance it is, the most important things to do are compare coverage and pricing between several companies before selecting one and make sure you get enough coverage to adequately protect you and your property. Be sure to contact a mortgage banker to discuss your specific situation.