When you are signing the final papers on your home purchase, you will almost certainly be advised about insurance. There are 4 types of insurance in the mortgage industry, and it can be confusing to differentiate between them and what you actually need. For example, if you already have life insurance, do you really need mortgage insurance as well? Let’s break it down so you can understand what each type of insurance offers and make the decision that’s right for you.
1. Mortgage Loan Insurance: AKA Default Insurance, this type of insurance is paid by you, but it’s there to protect your lender in the event that you can’t make your mortgage payments. When do you have to pay this? When you are buying your home and have less than 20% down payment. How can you avoid paying this? Have at least 20% to put down on your home. The only way Default Insurance benefits the borrower is when you really can’t come up with that 20%, you can still get approved and it helps you get a better interest rate. Generally, the premium is added to the loan amount and paid back over the life of the mortgage.
2. House Insurance: This is the insurance you get to protect you in the event that your home is damaged due to fire, theft, weather damage, etc. This insurance is always required by the lender, because not only does it protect your investment – it’s also protecting theirs.
3. Mortgage Life/Disability Insurance: We never expect anything bad to happen. We all plan on living long, healthy, boring lives – except that isn’t the way life works. Life/Disability Insurance ensures that your mortgage gets paid if you ever have an accident that prevents you from working and being able to make your payments. There are different types of policies available and some of you may even have a policy like this from your employer. It’s important to review the policy and understand exactly what is and isn’t covered. Term life insurance policies with sufficient death benefits can often cover both your mortgage and life insurance needs, but it does cost more and you have to qualify. Talk to a licensed Insurance Agent to get informed and know what you need.
4. Title Insurance: Title Insurance protects the property owner and the lender against any losses that are related to the property title. Title issues include liens, errors in public records, missing heirs, forgeries/fraud, boundary disputes and so on that prevent you from having clear ownership of the property. Not always required, but some lenders may make this a condition of financing. It’s a good idea to speak with your lawyer or insurance provider for more details and to determine if it’s the right choice for you.
Love it or hate it, having insurance is often a necessity and at the end of the day, can give you a feeling of security, knowing you and your family are protected no matter what comes your way.