Do You Need Additional Insurance?
Your monthly mortgage payment is broken into four parts: PITI , which stands for principal, interest, taxes, and insurance. It’s important that you understand each piece of your payment so that you know where your money is going. The principal balance of your loan is the actual amount borrowed. Interest is what your lender charges you for borrowing from them. Most of your monthly payments will go toward paying down your principal and interest. Taxes are charged for real estate property and are determined by your local government. They’re charged annually, but are typically broken up into 12 payments throughout the year and held in an escrow account until taxes are due. Your insurance is collected in the same way and held in an escrow account until it’s due. However, insurance is not as straightforward as the other parts of your mortgage payment and varies depending on your loan type. Make sure you talk to your lender so that you understand what is required. Some insurances are required when you get a mortgage loan and others are not. Let’s talk about what coverage you’re required to purchase, and what insurances may be a good idea to add.
Required insurance
Mortgage insurance (MI)
MI will be required on some loans depending on how much down payment you make. If you put less than 20% down, MI is usually mandatory. Not all loans require MI. A VA loan, for example, does not require the borrower to pay MI. Instead, an upfront VA funding fee replaces MI. If you are required to purchase MI, it can be dropped after you have 20% equity in your home. This means that your loan-to-value (LTV) ratio gets down to 80%. If you’ve made your loan payments on time and in full, you should hit 80% LTV by a certain date, which should be stated in the MI disclosure you got at closing. You can also do a quick calculation to see what your LTV ratio is: For example, if your loan balance is $180,000 and your home value is $225,000, you get the difference of 0.8. When you multiply that number by 100 (to get a percentage), your LTV ratio is 80%. That means your have 20% equity in your home and can request cancellation of your MI through your lender.
Homeowners insurance
Homeowners insurance is also required when you get a mortgage loan. This protects your property in case of fire, theft, or damage. You’ll have to purchase homeowners insurance before you close and have proof of insurance to show your lender. Some homeowners insurance policies include coverage for stolen jewelry and stolen or damaged electronics or furniture. Homeowners insurance not only protects you, but it also protects your lender in case of foreclosure or in the event of a disaster. Usually, your lender will require you to have at least enough homeowners insurance to cover the cost of rebuilding the house.
Title insurance
You will also be required to purchase title insurance , which protects you from financial loss related to property ownership. The title says who owns the property legally, so title insurance protects you if someone else claims ownership. One type of title insurance protects you, the borrower, and the other protects your lender. You only have to worry about the owner policy — your lender will purchase their own.
Additional insurances
Some insurances are not required by your lender, but may be beneficial to purchase.
Personal property insurance
Homeowners insurance covers some personal belongings, but not all. You have the option to purchase additional person property insurance to cover any items your homeowners insurance doesn’t, like art, collectibles, and firearms.
Home warranties
Home warranties are not insurance, but they do protect you in case something breaks. For example, you may have a home warranty on your HVAC system, which can cover service incase the system breaks or needs repairs. A one-year home warranty is frequently offered on newly built homes, and can also be negotiated with the seller in your contract. It’s up to you whether you choose to purchase additional insurance, but talk with your mortgage banker and insurance agent about your options. They will be able to guide you so you have the coverage you need.