Insurance is inevitable if you are buying a home, but there are ways to avoid paying the maximum premiums!
If you are buying a house for the first time, you likely have questions about the many types of insurance and fees you will be responsible for. One of the biggest queries is whether you will need mortgage insurance vs home insurance, or homeowners insurance.
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These two types of insurance are radically different, even though you are responsible for paying both types of premiums! Homebuyers insurance protects you and your property and household items. Mortgage insurance protects the lender in case you don’t pay your mortgage, and it is often rolled into your mortgage payments.
Mortgage insurance is usually called Private Mortgage Insurance (PMI) because you pay it to a private, third-party insurance company that is chosen by your lender. You always need home insurance, but you don’t always need PMI. Read on to discover why.If a claim is approved, homeowners insurance is paid out to you, so it’s something you absolutely want. If anything happens to your home, you will want some help in paying for repair work that needs to be done. Even a small kitchen fire or a tree branch landing on your roof can lead to $10,000 in damages, and once you tear out ceiling tiles or drywall, you could reveal hidden issues that need attention. The costs involved with owning a home are usually large and surprising.
Most people don’t know this, but once you have completed your payments on your mortgage, you might be able to cancel your homeowners insurance, but if you do, you are gambling with some really terrible odds. Homeowners insurance typically costs about $1500 per year for $250K in coverage. This means your monthly premiums will be $100-200 per month, for most houses.
Not every homebuyer will need PMI. This is a premium you need to pay so that if you default on your mortgage it is paid out to your mortgage lender. PMI payments are made by people if their down payment is less than 20% of the sale price of the home.
PMI payments can be 0.3% to 1.5% of the loan amount, depending on the size of your down payment. (Usually they are about 1%.) As you would expect, if you have a large down payment, you can negotiate a lower PMI percentage.
You might be required to pay for this in an up front fee when you purchase your home, or you might be able to roll it into your monthly or biweekly mortgage payments, or it could be a combination of the two methods of payment.
However, if you are buying a home using a Federal Housing Administration (FHA) loan, you might be required to pay PMI for the entire duration of your mortgage payments.
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You do not always have to pay PMI premiums! You can also get out of it after a few years.
If your down payment was over 20% of the sale price of your home, you’re not likely going to be required to pay a PMI premium. Good for you! However, if you are reading this article, chances are you are a first time home buyer. Most people don’t have over 20% saved up for their down payment, especially in today’s economy.
After a few years, however, you may be able to renegotiate the terms of your PMI, and lower the payments or stop paying it altogether once your home reaches 20% equity. This means you’ve paid 20% of the value of your home.
For example, if your home sold for $500K and you paid $50K in a downpayment and then over the years, you paid another $50K in mortgage payments, you now outright own 20% of your home and this means your home has reached 20% equity (ie. $100K). Generally speaking, you can stop paying PMI at this point, if you renegotiate with your lender.
Claire Smith Claire is a creative entrepreneur with a variety of marketing and content creation skills, including blog and web copy writing, research, and strategy. She has a Masters in Cultural Studies from Queen's University and is known for thinking laterally about marketing, based on her deep knowledge of people and behavior.
