Title Insurance, Homeowners Insurance, and Private Mortgage Insurance: What’s the difference?
If you're new to the homebuying process, you might be confused by the different types of insurance involved throughout the mortgage process or wonder why you even need these policies in the first place. That's why we're breaking down the required insurance policies, who they protect, and why you need them.
Title insurance protects homeowners and lenders against disputes, defects, or issues with a title as the property transfers from one owner to another.
Before obtaining the title insurance, the title company or attorney must search records to ensure no problems with the deed, such as pending legal action, liens, errors, etc. The title company or attorney will make sure it is a "clean deed" that can transfer from one owner to another without issue.
Then, two policies will be written for the title insurance, which will protect the owner and lender by paying legal defense if anyone were to challenge the title legally.
1. The Loan Policy will protect the lender's interest should an issue arise and is usually based on the dollar amount of the loan. Once the loan is paid off, the policy will disappear.
2. The Owner's Policy will cover the owner and is usually based on the real estate purchase price.
A standard homeowners insurance policy will cover losses and damages on your home's structure(s) and your belongings in the case of a destructive event, such as a storm or fire.
Typically, a homeowners insurance policy will cover interior and exterior damages, loss or damage to personal assets, and personal injury that occurs on the property.
Earthquakes and floods typically need separate coverage, while most basic policies cover events like hurricanes or tornadoes.
As a borrower, you will need to secure both title insurance and homeowners insurance before closing on your new home.
Private Mortgage Insurance
Private Mortgage Insurance, also known as PMI, is a type of mortgage insurance required for borrowers who put less than 20% down on their loan.
Typically, the lender will arrange for private mortgage insurance through a third-party company.
Most borrowers pay PMI as a monthly premium, added to the monthly mortgage payment. The amount paid is shown on the Loan Estimate at the beginning of the mortgage process, and again on the closing disclosure that the end of the process.
However, sometimes the mortgage insurance can be paid upfront in one lump sum. This is more common with down payments that are closer to 20%.
The third option for paying PMI is to pay an upfront sum in addition to monthly payments. The upfront sum will help lower the monthly payments.
How much should buyers expect to pay in PMI?
Borrowers will typically pay .05% to 0.1% of the loan amount annually. For example, if the PMI is .05% on a $200,000 loan, then the borrower's premium will be $83 per month.
How can borrowers avoid PMI?
Borrowers can avoid paying private mortgage insurance by putting down at least 20% on their loan. Additionally, some loans, such as the VA Loan, do not require PMI.
This is not a commitment to lend.
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