Types of Insurance You May Need for Your Home
A guide to options and necessities when you finance or refinance a home.
Mortgage lenders are in the business of helping you, the borrower, get the money you need for the home you want. To protect their investment, mortgage lenders sometimes require different forms of insurance to enable them to protect their investment. Here's a look at the major types.
Mortgagee Title Insurance is almost always required by lenders to protect them from any problems with your title that may have financial consequences. The Mortgagee Title Insurance Policy is paid for with a one-time payment at closing. BUT PROTECTING THE MORTGAGE LENDER DOESN'T PROTECT YOU. For example, if a past-due property tax bill suddenly surfaced after you closed on your property, you'd have to pay it.
The Owner Title Insurance Policy protects YOU personally against loss from title problems. It, too, is paid for by a one-time payment, due at closing. It insures that your ownership in the property will be secure at the time of your purchase. So, if a past-due property tax bill came up, your Owner Title Insurance Policy would protect you. In addition to the Owner Title Insurance Policy, there is also an Expanded Owner Title Insurance Policy that provides even greater coverage. We can answer any questions you might have concerning the differences in coverage.
When you refinance your home, you will need to secure a new Mortgagee Title Insurance Policy for the new lender. This will require a new title search to determine if any liens, encumbrances or transfers regarding the property have occurred since the previous mortgage was recorded.
This type of insurance policy protects you and your lender against loss resulting from fire, theft, a tree falling on your roof, and other unfortunate events. Because these calamities can reduce the value of your property below the amount for which, it is mortgaged, your mortgage lender will insist on having its name added to the Casualty Insurance Policy when you secure an initial mortgage or refinance. This type of insurance policy requires an annual payment.
You might think that a Homeowner's Policy would cover against a disaster like flooding. Not so, which is why it is offered separately. If your property falls within a designated flood hazard area, your mortgage lender will insist that you have this flood insurance, and that its name is on the flood insurance policy. The coverage is valid for the term of the insurance policy (usually one year) and an annual payment is paid to keep it current.
In some cases, the amount of money you borrow from your mortgage lender may be high compared to the value of the property. If you finance more than 80% of the value of your property, you may need to secure Private Mortgage Insurance (PMI) to protect the lender. When you finance a larger percentage of the value of your home, you maybe required to purchase PMI. This type of insurance is paid for annually, and its rate often decreases each year. Once you have reached 20% equity in your property, your lender will permit you to cancel your PMI policy.
Credit Life Insurance is a type of life insurance that pays the balance owed on your mortgage in the event of your death. If you have credit life insurance coverage prior to refinancing, you may have difficulty transferring the coverage to the new mortgage. Your ability to effect this transfer may hinge on: 1) an agreement with your lender and 2) the amount of coverage for the existing mortgage being less than the new mortgage amount, since credit life is a declining amount of insurance coverage. This type of policy requires an annual payment.