Homeowners Insurance and Your Mortgage
Whether you’re a first-time home buyer or you’re experienced in real estate transactions, the process of finding, exploring and negotiating for your new home is exciting. But once you’ve found a new place you’ll have some paperwork to manage.
Navigating that paperwork along with all of the requirements during a home sale can be confusing, especially when it comes to your mortgage and your homeowners insurance. But don’t worry — your mortgage lender and American Family Insurance agent are on your side to answer a wide range of questions. Let’s break down the basics.
What Is Homeowners Insurance?
When you buy a home, there are two types of insurance that’ll come into play: homeowners insurance and private mortgage insurance (PMI). We’ll define both to give you a clearer picture of what your insurance obligations are as a homeowner. Let’s start with homeowner’s insurance:
Homeowners insurance is the insurance policy you’re going to rely on if something happens to your home, your personal property and/or guests on your property. Your mortgage lender will require homeowners insurance because they want to know that their investment is protected.
But the main purpose of your homeowners insurance is to meet your specific, unique needs. Of course, it offers the property and liability protection you’d expect from a top-notch policy — but at American Family, you can customize your policy with a wide variety of add-on coverages. Ask your American Family agent about insurance endorsements and saving money by bundling and taking advantage of discounts.
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) is not meant for home buyers and owners. Instead, PMI is how mortgage lenders protect themselves from borrowers who stop paying, default and foreclose on their homes.
PMI is typically required for borrowers who can’t make a down payment on the home of 20 percent or more. But after you’ve paid down at least 20 percent of your mortgage’s principal, you should ask your lender to remove the PMI.
Homeowners Insurance, Your Mortgage and Escrow
Now that we’ve explained the difference between PMI and homeowners insurance, let’s get back to the question of the latter being included in your mortgage. If you pay for your homeowners insurance as part of your mortgage, you have an escrow.
An escrow is a separate account where your lender will take your payments for homeowners insurance (and sometimes property taxes), which is built into your mortgage, and makes the payments for you. This is advantageous for both you and your lender — you don’t have to worry about keeping track of one or two more bills, and they’re assured that you’re staying current on those financial obligations.
Some borrowers will be required to escrow their insurance and property taxes into their mortgage payments, and some won’t. Like your PMI, if you haven’t paid a 20 percent or more down payment on the home, chances are that your lender will require it.
If you’ve made a down payment of 20 percent or more, you can usually choose whether or not you want to pay your insurance with your mortgage. Those who decline to pay via escrow generally prefer to pay their insurance in one lump sum or have more control over when payments are made.
Have more questions about what you need to get a mortgage, the steps necessary to buy a home or how big of a home loan you can afford? We’ve got you covered — get started with the mortgage basics and you’ll be on your way to home ownership.
Whether you’re going to have your homeowners insurance rolled into your mortgage payments or not, it’s best to talk to your American Family Insurance agent long before you sign the lender’s paperwork. That way, your new homeowners insurance policy will be ready and waiting when you walk through your front door.