There’s nothing more exciting than buying your own home. You get to choose the exteriors, and interiors and, above all. own a property that you can count on for financial emergencies throughout your life.
If you’re a first-time buyer, you have likely come across multiple mortgage options for your upcoming home purchase in Dallas. Today, we’ll talk about two popular mortgage terms, homeowners insurance and mortgage insurance. The way they work, and which is better and why.
Everything You Need to Know About Homeowners Mortgage
Just like you buy car insurance when you purchase a new car, you may want to invest in homeowners insurance before you put your huge investment at risk. As a general rule, almost all Dallas best mortgage lenders require homeowners to get this type of insurance before they move forward with their application.
Homeowners insurance is also called Hazard insurance. This is because this type of insurance provides coverage for homeowners against damage caused by unforeseen events. For example, with homeowners insurance, you can repair or rebuild your home after certain circumstances, such as fire, theft, etc.
You can also get repairs done in case of damage caused by weather, including wind or hail (Remember, not all types of homeowners insurance covers all these things. There are exceptions, and your insurance provider can guide you best about which things are/aren’t covered by your insurance plan).
Some standard homeowners insurance options might even cover furniture, clothing, legal or medical expenditures, and more. So it depends…
Speaking of the process, similar to other conventional insurance options. You’ll have to pay a premium to keep your policy active and alive.
Everything You Need to Know About Mortgage Insurance
Mortgage insurance, popularly known as PMI, as its name suggests, is a type of insurance that provides protection to the lender in case a borrower defaults on a mortgage loan. This means mortgage insurance favors a lender in high-risk situations, especially when there is more time period involved or a borrower’s credit history isn’t as satisfactory as it should be.
Whether or not a borrower needs to pay mortgage insurance depends on the type of mortgage loan they’re applying for and several other factors, including the amount of downpayment deposited in the beginning, the total amount of the loan, etc.
Generally, buyers who pay less than 20% down payment are liable to pay PMI, which will eventually be reduced after some time when a certain percentage of the mortgage is repaid. Because FHA and USDA loans lend money to borrowers who pay less than 20% down payment, they’re usually required to pay PMI.
The average cost of PMI ranges between 0.58% and 1.86% of the actual loan amount. Borrowers usually have to pay the PMI premium along with their regular monthly mortgage payments. Also, some buyers prefer to pay the entire lumpsum amount at the time of closing.
Your lender is the one who’s responsible for arranging a PMI for your loan application, and the policies are provided by insurance companies.
The only thing you can do to avoid PMI is to make at least a 20% downpayment in the beginning. Alternatively, you can look for a lender with their own mortgage insurance program. These programs are usually available for first-time homebuyers or people with unstable income streams.
Additionally, if you qualify for a VA loan, you may be able to acquire a loan without any sort of PMI requirements.
The key difference between homeowners insurance and mortgage insurance. IS that the latter facilitates lenders while the former is designed to support homeowners.
Another difference is that lenders will always ask for homeowner’s insurance, but PMI is applicable in certain circumstances only.
Homeowners insurance is typically required for a borrower who is financing their home purchase. On the other hand, mortgage insurance is required by a borrower with insufficient financing. To cover the minimum 20% down payment requirements.
In the case of homeowners insurance, you will have to pay the premium directly to the insurance or mortgage firm. However, borrowers have to pay their PMIs as part of their monthly mortgage installments when they opt for mortgage insurance.
Last but not least, the average annual cost for homeowner’s insurance is $1312/year. While it costs you anywhere between 0.58% and 1.86% of your actual loan amount in the case of PMI.
Do I Need Homeowners Insurance?
In all honesty, homebuyers need to have some sort of insurance in order to be eligible for the official mortgage process. Also, many people prefer to get homeowner insurance as it benefits them in the long run.
Just imagine the amount you’ll have to pay to rebuild or repair your house in case of any unforeseen event or replace all of your possessions if your property catches fire or any other event of a covered disaster. The cost of homeowner insurance in all such events makes perfect financial sense.
Do I Need Mortgage Insurance?
The short answer is it depends.
In case you’re short of financing during the initial phases of your mortgage application period. A PMI opens the door to a mortgage for you even if you’re not able to meet the 20% down payment requirement. But the good thing is you can always cancel your insurance at any time if you have already repaid a good amount of money to your lender.
Are These Two Insurance Types Interchangeable?
Homeowner insurance and mortgage insurance are two entirely different types of mortgages. While one is designed to facilitate the homeowner, the other’s goal is to provide security to the lender.
You may or may not need to invest in both these mortgages at the same time. And this depends on your lender’s requirements, the type of mortgage program you’re applying foryour credit score, DTI. And other program-specific requirements.
As you work through the mortgage process. You’re likely to encounter both types of mortgages we have discussed in this article. Just ensure you carefully go through the mortgage requirements you have selected for your financing needs. Also, discuss PMIs in detail with your lender before you seal a deal for your next home purchase.