A typical homeowner has multiple insurance policies beyond a standard homeowners insurance policy. Some types of insurance are optional and some are mandatory, depending on your location and whether you have a mortgage. Some insurance policies protect you directly, while others safeguard your lender. — Mortgage insurance protects the lender or investor against default from the borrower, says Anthony Guarino, vice president of public policy development and research at Genworth Financial Mortgage Insurance in Raleigh-Durham, N.C. The borrower pays the insurance premium, even though the lender is the beneficiary. Usually, the premium is added to the monthly mortgage payment.
Private mortgage insurance, or PMI, is required for conventional loans with down payments of less than 20 percent. Premiums vary according to the characteristics of the mortgage loan and the borrower, Guarino says.
"PMI was created because lenders were unwilling to make loans with a lower down payment because of the risk," says Guarino. "Without PMI, homebuyers would have to come up with a 20 percent down payment for their purchases."
Private mortgage insurance has a government counterpart: the Federal Housing Administration, which insures FHA loans.
Title insurance protects the policyholder against claims about rightful ownership of a piece of property. If you borrow money to buy a home, your lender will require title insurance.
"Title insurance for the lender is issued for the amount of the mortgage loan and only lasts until the loan is paid in full," says Jeremy Yohe, director of communications for the American Land Title Association in Washington, D.C. "The policy protects the lender to ensure the enforceability of the title."
Regulations about title insurance vary. In some states, owner's title insurance is voluntary, while in others it is mandatory for homebuyers.
Homeowners insurance, also known as hazard insurance, is required by the lender if you have a mortgage. If you pay cash for your home this insurance is optional, although financial experts recommend insuring your property against fire, theft and other potential losses.
"The idea of homeowners insurance is to be able to replace the property to the condition it was in the minute before the loss occurred," says Dan Muhlenkamp, owner of the Preferred Insurance Center in Coldwater, Ohio. "The lender doesn't want the property to be worth less than the value of the mortgage, so that's why lenders insist on insurance coverage."
After a loss, you will receive payment directly from the homeowners insurance company after a claim is processed. In some cases, your lender's name will also be on the payment.
"An insurance company will help you figure out how much coverage you need based on an estimate of what it costs to rebuild the home," Muhlenkamp says.
Some lenders require homeowners to pay their home insurance premiums through an escrow account with their mortgage payment in order to make sure the policy is kept current, but homeowners can sometimes opt to pay the premiums on their own.
Homeowners insurance covers most things, Muhlenkamp says -- fire, theft, wind damage "and even things like a deer running through your window."
But a standard homeowners policy doesn't cover everything. "That list of exceptions is fairly long and includes things like acts of war, earthquakes and floods," Muhlenkamp says.
Homeowners can add "endorsements" to policies to cover losses from events that aren't covered by the standard policy.
"Earthquake insurance can be added to a standard policy, but the price varies widely according to where you live and how likely it is you'll have an earthquake," Muhlenkamp says. "The deductible for an earthquake is a lot higher than your normal deductible, usually 5 (percent) or 10 percent of your coverage. On a $300,000 home, that means the deductible would be $15,000 or $30,000."
Flood insurance is a separate policy, bought from the federal government.
"If you live in a designated flood zone, you'll be required by your lender to buy flood insurance," Muhlenkamp says. "Even if you are not in a flood zone, you should probably consider buying it after doing some investigation into the likelihood of a flood at your home. Flood damage can be very costly and will not be covered by a standard homeowners insurance policy."
Muhlenkamp recommends a "water backup of sewers and drains" endorsement on a standard homeowners insurance policy for all homeowners with a basement because it's an inexpensive add-on that will provide coverage if a blockage causes water to flood the basement.
Homeowners insurance policies generally provide a designated level of coverage for personal property, but Muhlenkamp recommends buying supplemental coverage for items such as jewelry, art, collectibles or guns that are not covered by the standard policy.
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Mortgage rates dropped to new lows this week as signs continue to point to a slowing economy in the United States.
The 30-year fixed-rate mortgage fell 3 basis points to 3.75 percent. A basis point is one-hundredth of 1 percentage point.
The 15-year fixed-rate mortgage fell 4 basis points to 3 percent. The average rate for 30-year jumbo mortgages, or generally for those of more than $417,000, fell 5 basis points to 4.38 percent.
The 5/1 adjustable-rate mortgage, or ARM, was 2.89 percent, the same as last week. With a 5/1 ARM, the rate is fixed for five years and adjusted annually thereafter.
The volume of mortgage applications increased 0.9 percent last week compared to one week earlier, according to the Mortgage Bankers Association.
(Distributed by Scripps Howard News Service. Reach Michele Lerner at editors(at)bankrate.com)
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