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What Homebuyers Need To Know About Homeowners Insurance

What Homebuyers Need To Know About Homeowners Insurance

New homeowners may anticipate closing costs associated with buying a home, but may not anticipate the ongoing costs of homeownership. As you complete your home purchase it is important to understand the cost of homeowners insurance, which will be required by your mortgage lender and is intended to protect your investment.

What is homeowners insurance?
Homeowners insurance is a specific type of policy that protects homeowners against potential losses from disasters such as fire, storm damage or burglary. It will also protect against certain types of personal harm that could happen to others on your property. You may also add coverage for earthquakes or flooding depending on where your property is located. If you live somewhere flooding is likely, your insurance company may require additional flood coverage.

A home insurance policy covers four major areas:

  • Dwelling, which covers damage to the home and attached structures.
  • Additional living expenses, which covers living expenses if your home becomes unlivable.
  • Personal liability protects you against lawsuits from damages or personal injuries that occur on your property.
  • Personal possessions, which covers destroyed or stolen personal property.

How is private mortgage insurance different from homeowners insurance?
Private mortgage insurance (PMI) is paid to protect the mortgage lender and bank from the homeowner defaulting on the loan. PMI is paid until the homeowner owns at least 20% of the home. Although there are variables in policies for PMI, these variables will be decided by the mortgage lender and included in the closing disclosure. PMI may also be included in your monthly mortgage payment.

Homeowners insurance is paid to protect the homeowner throughout the time that they own the home. It may also protect the mortgage lender and bank during the time of the mortgage loan. Homeowners insurance should be paid regardless of your mortgage loan. Homeowners insurance will include many variables that can change to match your preferences and needs.

Learn more about Private Mortgage Insurance.

What does homeowners insurance have to do with my mortgage?
All mortgage lenders will require you to purchase homeowners insurance at the time of your home purchase. Similar to a car dealership requiring proof of insurance, this is to ensure that something will not affect the value of your house after purchase. It is even more important when the homeowner is repaying their mortgage to a bank for the cost of the home. Even if the home is yours, the bank still owns equity in the home, and they will want that equity to be protected.

Your mortgage lender will establish that you have homeowners insurance prior to closing on a home. You will want to speak with your mortgage lender to establish what coverage you will need. Most likely, your policy will need to ensure that 100% of the home’s cost is insured.

Can homeowners insurance be included in mortgage payments?
Yes, it can be. When you pay your homeowners insurance as a part of your mortgage, it’s called having an escrow. Depending on your lender, you may be asked to have an escrow as opposed to seeking homeowners insurance privately if you own less than 20% equity in your home. This is to ensure that your home is protected for both you and your mortgage lender.

If you own more than 20% equity in your home, you may still choose to have an escrow. Some homeowners will do this to minimize the number of payments that they are responsible for or to also include property taxes into their escrow, which is also an option.

Is homeowners insurance required?
Before you close on your home your mortgage lender will likely require you to have a homeowners insurance policy. This is to protect your equity in the home as well as the equity owned by the mortgage lender or bank.

It is possible to sign a home insurance binder, which acts as a temporary policy while purchasing a home. This may be helpful if you are planning to close on a home quickly.

How much should homeowners insurance cost?
The cost of homeowners insurance is highly variable depending on location, risks like flooding or earthquakes, and the value of your home. However, in the US it typically costs between $600-1,200 per year. You can expect to pay about $35 per month for every $100,000 of home value.

When is a certain coverage required?
If your home is going to require additional insurance coverage, such as earthquake or flooding coverage, your realtor and mortgage lender should be aware of this before the home is placed under contract. That’s why it’s important to understand what to expect to pay in closing costs and to have an estimate about the cost of homeowners insurance.

Visit the RatePro Mortgage blog to learn more about closing costs and contact us to answer your questions about mortgage loans.


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