Buying or refinancing a house includes costs for different types of insurance. Some are required and some are optional. Here, I’ll answer questions about the different types of insurance products encountered when transacting a mortgage.
I see “Homeowner’s Insurance” on my Good Faith Estimate. What is that? Homeowner’s insurance is sometimes called Property and Casualty insurance, and is purchased to protect the homeowner and lender from any losses arising from natural disasters or accidents, such as fire, storms, etc. It is mandatory coverage for any loan. It also provides insurance against theft and damage of contents, and liabilities arising from injuries sustained on your property.
I had to pay for a Flood Certification when I applied for a loan. What is that? FEMA maintains records of all zones in the U.S. subject to flooding. If your Flood Cert. indicates that your house is in a Federal flood zone, it will be required that you purchase Flood Insurance through your Homeowner’s Insurance agent.
What is Private Mortgage Insurance? Often referred to as PMI or MIP, this insurance is required on any loan that exceeds 80% of the value of the home being purchased or refinanced. It is default insurance and protects the lender in the event of a default and foreclosure, if they lose money in the sale of the foreclosed house. It does not protect the borrower from anything, and the premium is paid as part of your monthly payment until your loan balance reaches 80% or less of the appraised amount.
How can I get rid of PMI? On an FHA loan, if you start with PMI, it now runs for the life of the loan. On conventional loans, it will run a minimum of 2 years. After that, you can re-appraise your house and if there is 20% equity and you paid your last 24 payments on time, PMI can be dropped. If you do not re-appraise your house, PMI will drop off automatically in about 9-10 years on a 30 year loan, and in about 49 months on a 15 year loan.
How can I insure that my loan will be paid if I am disabled or die? This type of insurance is optional and not required by any lender. The best rates for healthy individuals is to purchase disability or life insurance from a local insurance agent. Lenders offer these types of policies, but they are generally non-qualifying policies and cost much more. Disability insurance can be designed to pay your monthly mortgage payment if you are disabled. Declining Term Life Insurance can pay off your mortgage balance if you are deceased.
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