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What are homeowner's insurance, private mortgage insurance
and title insurance?
A
homeowners insurance policy is a package policy
that combines more than one type of insurance coverage in a
single policy. There are four types of coverages that are
contained in the homeowners policy: dwelling and personal
property, personal liability, medical payments, and
additional living expenses. Homeowner's insurance, as the
name suggests, protects you from damage or loss to your home
or the property in it.
Remember
that flood insurance and earthquake damage are not covered
by a standard homeowners policy. If you buy a house in a
flood-prone area, you'll have to pay for a flood insurance
policy that costs an average of $400 a year. The Federal
Emergency Management Agency provides useful information on
flood insurance on its Web site at
www.fema.gov. A separate
earthquake policy is available from most insurance
companies. The cost of the coverage will depend on the
likelihood of earthquakes in your area.
Private mortgage insurance (PMI) and
government mortgage insurance protect the lender
against default and enable the lender to make a loan which
the lender considers a higher risk. Lenders often require
mortgage insurance for loans where the down payment is less
than 20 percent of the sales price. You may be billed
monthly, annually, by an initial lump sum, or some
combination of these practices for your mortgage insurance
premium. Mortgage insurance should not be confused with
mortgage life, credit life or disability insurance, which
protect you and are designed to pay off a mortgage in the
event of your death or disability.
You may
also encounter "lender paid" mortgage insurance ("LPMI").
Under LPMI plans, the lender purchases the mortgage
insurance and pays the premiums to the insurer. The lender
will increase your interest rate to pay for the premiums --
but LPMI may reduce your settlement costs. You cannot cancel
LPMI or government mortgage insurance during the life of
your loan. However, it may be possible to cancel private
mortgage insurance at some point, such as when your loan
balance is reduced to a certain amount. Before you commit to
paying for mortgage insurance, ask us about the specific
requirements for cancellation in your case.
Title insurance is usually required by the lender
to protect the lender against loss resulting from claims by
others against your new home. In some states, attorneys
offer title insurance as part of their services in examining
title and providing a title opinion. The attorney's fee may
include the title insurance premium. In other states, a
title insurance company or title agent directly provides the
title insurance.
A
lenders title insurance policy does not protect you.
Neither does the prior owners policy. If you want to protect
yourself from claims by others against your new home,
you will need an owner's title policy. When
a claim does occur, it can be financially devastating to an
owner who is uninsured. If you buy an owner's policy, it is
usually much less expensive if you buy it at the same time
and with the same insurer as the lender's policy.
To save
money on title insurance, compare rates among various title
insurance companies. Ask what services and limitations on
coverage are provided under each policy so that you can
decide whether coverage purchased at a higher rate may be
better for your needs. However, in many states, title
insurance premium rates are established by the state and may
not be negotiable. If you are buying a home which has
changed hands within the last several years, ask your title
company about a "reissue rate," which would be cheaper. If
you are buying a newly constructed home, make certain your
title insurance covers claims by contractors. These claims
are known as "mechanics liens" in some parts of the country.
The American Land Title Association has consumer title
insurance information available at its website,
www.alta.org.
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