Buying a home is likely the largest purchase you will make in your lifetime, so protecting your assets is a must as a homeowner. There are several different types of insurance associated with purchasing a home, some of which you have control over and others required by your mortgage lender to protect their collateral.
Homeowners insurance, also known as hazard insurance, is required to protect your home, property, and items within. When you get a mortgage, the house is your mortgage lender’s collateral, which is why lenders require their borrowers to have a minimum level of homeowners insurance. Homeowners can increase their coverage to their comfort level.
Homeowners insurance has a variety of coverage, and your losses are only covered by perils stated within your policy. For instance, if your home is damaged due to an earthquake but your policy doesn’t cover earthquakes, your insurance agency won’t pay for damages incurred.
It is important to review the areas of your policy to determine coverage limits. Areas of homeowners coverage include:
- Dwelling – damage to the home and areas attached to the home, including fixtures such as plumbing, electrical wiring, heating and permanently installed A/C systems.
- Other Structures – includes damage to fixtures not attached to the home, such as fences, sheds, and freestanding garages.
- Personal Property – covers the items within the home and reimburses you for the value of your possessions.
- Loss of Use – covers costs of living in an off-site location, such as an apartment, if your home was extensively damaged and unlivable.
- Personal Liability – covers financial loss if you were to be sued for injuries or property damage sustained from your property, such as someone falling down your stairs.
- Medical Payments – is part of personal liability and covers medical payments for someone injured on your property.
Flood insurance is specific to covering damages incurred by water and flooding. Mortgage lenders may require that you carry flood insurance on top of your homeowners insurance policy if your home is located in a high-risk flood area.
Private Mortgage Insurance (PMI)
If the down payment of your home purchase is less than 20 percent of the purchase price, your lender will also require you to carry PMI. Private mortgage insurance protects the lender if you default on your mortgage. PMI conditions vary from program to program. While some loan types allow your PMI to be canceled once 20% loan-to-value is reached, others require PMI to be carried for the life of the loan.
When closing on your home, you will likely see “title insurance” as a closing cost because it is required to cover any issues with the home’s title that were not uncovered in the title search. Title insurance is typically issued in the amount of the home’s purchase price and assures homeowners that the title company will stand behind the homeowner should any problems arise.
A home warranty is sometimes offered by home sellers or negotiated by buyers to insure items within the home, such as appliances, heating/cooling units, water heater, etc. for a limited time after the sale of the home is complete. Home warranties are additional and completely optional for homebuyers.
If you have any questions on the amount of insurance required to purchase a home, contact one of our mortgage bankers. For more information on home buying and financing, download our Mortgage 101 Handbook, a great resource for first-time homebuyers.