Much like car insurance, homeowners are required to carry insurance on their home.
The official name is “hazard insurance”. However, most often it’s called “homeowners insurance”. Homeowners insurance policies can cover minor incidents, including a leaky roof, faulty plumbing; and catastrophic damage such as from a storm.
Homeowners insurance is sometimes mixed up with Private Mortgage Insurance (PMI), which is specifically for the purpose of protecting the lender in the event of less than 20% equity. Regardless of your down payment or equity position, homeowners insurance is always required.
Why Homeowners Insurance is Required
Mortgage lenders require homeowners to carry homeowners insurance. There are a number of reasons for this but the most important one is that your lender will want your home rebuilt in case of a catastrophe. Your lender’s mortgage is collateralized against the home, after all. Without the home, the mortgage has little value.
By requiring homeowners to carry insurance for at least the cost of rebuilding the home, then, the lender and homeowner are both protected from disaster. Proper coverage will protect against foreclosure after a tornado, hurricane, or earthquake, as examples.
The Importance of Homeowners Insurance
Much like other types of insurance, paying for homeowners insurance makes some people cringe. In many homeowner’s minds it falls into the category of a necessary evil. Paying money each month for an intangible product can feel like you’re throwing money away.
Unfortunately, unless your home is paid off, homeowners insurance is mandatory.
Even if your home is paid off it’s still a good idea to keep coverage in place. In the event of damage, uninsured homeowners could lose their home. Since your home is typically your largest asset, losing it could be catastrophic. Even if you never had wind or fire damage, a slip by an uninsured worker could you thousands of dollars for medical and lost wages.
PITI – The Components of a Mortgage Payment
Most monthly mortgage payments are made up of four factors – Principle, Interest, Taxes and Insurance (PITI). Some mortgage payments may exclude taxes and insurance. At the very least, however, most payments will consist of Principle and Interest.
- Principal – The amount that goes toward the principal repayment of the loan. Generally, most mortgage loans are structured so that the amount of the principal starts out small and increases with each mortgage payment. This is known as amortization.
- Interest – What the lender receives for taking on the risk when loaning the money. The interest rate has a direct impact on the size of the mortgage payment – higher rates mean higher payments.
- Real Estate Taxes – The amount assessed and calculated by governmental agencies on a per year basis. Homeowners will usually pay these taxes as part of their monthly payments. The lender collects and holds them in an escrow account until the taxes are due.
There are two types of insurance that may be included in your monthly payment. Similar to real estate taxes, insurance payments are made with each mortgage payment and held in escrow until the bill is due.
- Homeowners Insurance – Also known as hazard insurance, this type of insurance protects the home and its contents in the event of fire, theft and other disasters.
- Private Mortgage Insurance – Also known as PMI, this type of insurance is generally required when a down payment of less than 20% is made. PMI protects the lender in the event the homeowner is unable to repay the loan.
Factors that Affect Homeowners Insurance Rates
Much like auto insurance, the cost of your homeowners insurance depends largely on where you live. Crime rates, access to your local fire department, police department and water supply will all impact your insurance rates. In addition to the value of your home, the following factors determine the amount you’ll pay for homeowner’s coverage.
- Age of House – Generally, the newer the home the cheaper it is to insure.
- Type of Construction – Brick homes will usually cost less to insure than frame.
- Local Fire Protection – The distance to a fire hydrant and local fire station determine your protection class, which affects your cost.
- Amount of Coverage – The amount of coverage, contents and liability, will affect the price you pay.
- Deductible Amount – The higher the deductible the lower the price of your insurance.
- Discounts – Most companies will offer a multi-policy discount amongst other incentives.
Buying a Home? Shop for Homeowners Insurance and Mortgage Rates
Whether you’re buying a home a considering a refinance, most of the services needed are also services for which you can shop. Homeowners insurance is a service you’ll want to shop for, as insurance premiums can vary significantly by company. Need a good recommendation for homeowners insurance? I’m happy to help. Simply fill out your info below or call me. I’m happy to help. [contactbuddy]