Personal Finance Essentials
Three Types of Insurance That Protect Your Home
Property and Casualty Insurance > Three Types of Insurance That Protect Your Home
When you buy a home, you’ll encounter three distinct types of insurance.
Many people confuse them, but each serves a different purpose and protects a different party.
Private Mortgage Insurance, or PMI, protects your lender – not you. If you put down less than 20% of the purchase price when buying a home, your lender will require you to buy it. The reason is straightforward: the less you put down, the more likely you are to default. PMI protects the lender in case that happens.
The cost is typically 0.5% or more of your original loan balance per year and is included in your monthly payment. On a $100,000 loan, that comes to roughly $42 per month, or $500 per year. Making a down payment of 20% eliminates the need for PMI entirely, which is one of the strongest financial arguments for saving a larger down payment before buying.
The cost is typically 0.5% or more of your original loan balance per year and is included in your monthly payment. On a $100,000 loan, that comes to roughly $42 per month, or $500 per year. Making a down payment of 20% eliminates the need for PMI entirely, which is one of the strongest financial arguments for saving a larger down payment before buying.
Homeowners insurance protects you, not your lender. If your home is damaged or destroyed, this coverage gives you the money you need to rebuild and replace its contents. Your lender will require proof of homeowners insurance as a condition of the mortgage. As discussed earlier, make sure your policy covers replacement cost rather than actual cash value, and review your coverage amount regularly.
Title insurance comes in two parts. One protects the lender’s interest up to the loan amount. The other protects your equity in the property. You are required to purchase the lender’s policy. The owner’s policy is technically optional, but strongly recommended.
Here’s why: your property may have changed hands dozens of times over its history, especially on the East Coast. There is a real possibility that the deed is defective or even fraudulent – meaning the person who sold you the home may not have had a clear right to sell it. Title insurance protects you from the catastrophe of losing your home because someone challenges the validity of the title in court.
Unlike other types of insurance, you pay for title insurance only once – at settlement – and it protects you for as long as you own the property. If you order the owner’s policy at the same time as the lender’s policy, the additional cost is quite low. Don’t skip it.
Here’s why: your property may have changed hands dozens of times over its history, especially on the East Coast. There is a real possibility that the deed is defective or even fraudulent – meaning the person who sold you the home may not have had a clear right to sell it. Title insurance protects you from the catastrophe of losing your home because someone challenges the validity of the title in court.
Unlike other types of insurance, you pay for title insurance only once – at settlement – and it protects you for as long as you own the property. If you order the owner’s policy at the same time as the lender’s policy, the additional cost is quite low. Don’t skip it.