Homeowner's Insurance - Why Do We Need It?
March 6, 2021
Homeowner’s insurance provides coverage to repair or rebuild your home, in the instances that are spelled out in the policy. Also known as hazard insurance, homeowner’s insurance typically covers damages to the house that occur from fire, smoke, theft, vandalism, and bad weather such as lightning, wind, or hail. Most policies also cover things inside in the home, such as furniture, electronics, and other possessions. They also cover the medical expenses and legal fees if people other than those living in the home are injured on the property.
Homeowner’s Insurance vs. Mortgage Insurance
Securing a homeowner’s insurance policy is required by your lender, but it is important that you do not confuse this policy with your mortgage insurance. While it is common to mix the two up, they are not the same! Homeowner’s insurance protects the borrower, while mortgage insurance protects the lender.
In the case of FHA loans, a monthly mortgage insurance premium (MIP) is paid along with the Up-front Mortgage Insurance Premium (UFMIP). In addition to funding the FHA, this mortgage insurance is there to protect FHA-approved lenders in case the borrower cannot repay the loan.
Similarly, conventional loans require private mortgage insurance (PMI). PMI is charged when borrowers make less than a 20% down payment on a conventional loan, making it riskier on the lender. The private mortgage insurance typically costs between 0.5% and 1% and is paid monthly until the borrower pays down enough on the principal amount - generally 20%, when the loan is no longer considered high-risk).
Never Assume
Unless specifically spelled out in your policy, do not assume that you are covered. Always keep in mind that you cannot claim coverage for issues that are not specified in your policy. This includes floods and earthquakes, but it may also apply to water damage from sewer pipes or storm drains, etc. Remember that flood and earthquake insurance is always sold separately. If you buy a home in an area designated as a flood zone or one that is prone to earthquakes, your lender may require that you purchase these additional policies.
Read and re-read your insurance policy so you know exactly what you are covered for. The wording of your agreement may be complicated, so take the time to ask your insurance agent as many questions as you have.
Costs and Coverage
The cost of your homeowner’s insurance policy varies based on several factors. First, there is the location of your home. This includes a bunch of factors within itself, such as how far your home is from a fire station, or how close it is to a body of water. Expect to pay a higher premium if you live in a high-crime neighborhood.
The age of your home will also affect the amount you pay. If you are purchasing a home built over 20 years ago, it stands to reason that there will be some upcoming claims for renovation. On the other hand, big upgrades such as a new roof or plumbing can bring down the cost of insurance.
A big factor that affects your insurance cost is the coverage you select. You can choose to have more extensive coverage in your policy if you have more valuables in your home, or to protect yourself from liability issues, but this will understandably raise your premium. The premium also varies based on the deductible you select. A higher deductible could reduce your premium costs up to 25%.
Finally, your insurance premium might look different from someone with the exact same policy because of your credit history. While a provider cannot refuse a homeowner, coverage based on their credit, they might offer a discount on the policy if their credit score is high enough. This gives borrowers one more reason to work on their credit when getting ready to buy a home.
------------------------------
RELATED VIDEOS:
Understand the Reasons for Private Mortgage Insurance
Carefully Read Your Closing Disclosure
Buying a Home With a Co-Borrower
FHA Loan Articles
April 30, 2025 In a previous post, we discussed why FHA borrowers should carefully consider whether paying for discount points truly serves their best interests, focusing on factors like short-term homeownership, opportunity cost, FHA mortgage insurance, and the prevailing interest rate environment. Discount points are an option for borrowers willing to pay a fee to lower the interest rate by a set amount. This is not right for all borrowers, and you don't want to pay for points you won't benefit from during the loan term.
April 29, 2025Are you considering buying a home with an FHA loan? You'll likely talk to your participating lender about FHA loan "discount points" – fees you pay upfront for a lower interest rate on your mortgage. The idea behind discount points is a straightforward exchange: you spend money today to reduce your interest rate. Typically, one point equals one percent of your total FHA loan. In return, your interest rate might decrease by an amount you and the lender agree upon.
April 28, 2025Home loans have various expenses that aren't apparent to a new borrower until much later in the process. What do you need to consider when making your home loan budget? It might not be complete without addressing some of the issues we cover here.
April 23, 2025 While the prospect of lower interest rates or more favorable loan terms can be enticing, there are situations where waiting is the better option. Refinancing without carefully considering your current financial circumstances is never a good idea, but careful planning in the current financial environment is even more important.
April 22, 2025First-time home buyers worry about loan approval, but there are important steps to take to increase the likelihood that the lender will approve their application for the loan or pre-approval. What do you need to know before you choose a lender?
