Insurance

When buying a home, you might wonder why are you getting charged for insurance twice. And is it even necessary?! The answer is yes. Here are the Whys:

Coverage vs form

While you may already know that you can get a policy with additional coverage (think comprehensive auto coverage vs. liability auto coverage), with a home there are actually two different forms of insurance. They are issued by very different types of companies.

Home Owner policy

Most people have heard of home owner and/or renter policies. If there is a fire, flood, earthquake, tsunami, etc, the individual gets some financial help. If you are getting a home loan (mortgage), one of the lender requirements is such a policy. Said policy protects the lender’s investment, namely the structure. The lender refers to this policy as Hazard Insurance.

Mortgage Insurance (MI)

A mortgage with less than 20% down, is required to carry MI. This assures the lender that if they have to foreclose on you, their costs will be covered by the policy. These are costs to get the borrower out of the home. Then the home is sold incurring realtors’ commissions and seller’s closing costs. MI will reimburse the lender for all these costs.

As you can see, the 2 policies are quite different. It is a good idea to keep the home owner policy for as long as you own the home. Even after the mortgage is paid off. However, you can request that Private MI be removed once you reach 20% equity in the home. You will need to have a lawyer write the request and then be prepared to pay for another appraisal to assure the lender that you have at least 20% equity in the home. This is only possible if you have been good about making your payments on time and in full.

If you have an FHA loan, the MI requirement is for the life of the loan.

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Happy home hunting!