Insurance coverage can be issued for most any type of asset. There is automobile insurance that covers the automobile in case of an accident as well as liability coverage. Any personal property can be covered as a rider to most homeowner’s insurance policies. Not only is the home covered in case there is a storm or fire but insurance policies can also protect personal valuables. As long as the asset can be independently appraised there can be a policy for it. For example, a person who owns an extensive art collection can have that asset appraised and in case of a fire and the collection is destroyed. While the homeowner would likely rather have the art collection back, an insurance policy can help alleviate some of the pain with financial compensation.
There is also mortgage insurance on different types of home loans. Some insurance companies issue special insurance policies that can cover monthly credit obligations when the borrowers are unable to work and earn income due to an illness or a disability. Yet that is not what lenders refer to as mortgage insurance. Mortgage insurance is a policy typically paid for by the borrowers in favor of the lender and while it is indeed an insurance policy it is completely different compared to a homeowner’s policy. Mortgage insurance is required on all three government-backed home loans, VA, FHA and USDA loans and most conventional loans with less than a 20 percent down payment and no secondary financing.
A basic homeowner’s insurance policy covers the physical structure of the home, personal belongings, liability and additional living expenses if you’re temporarily unable to live in the home due to a covered event such as a fire. The homeowner’s policy will repair and replace a home due to damage by a fire, hurricane, hail or lightning or other covered events listed in the policy documents. If a homeowner is in a flood zone, an additional flood insurance policy will be required. How much coverage someone should have should at least take out a policy that would cover an amount needed to completely rebuild the home.
Personal belongings are also covered usually only at 50 to 75 percent of the current value. Most insurance agents today will ask that you list your personal items and keep that list in a safe place, off premises. Homeowners can also take a video inventory by clothing and personal possessions room by room as documentation. Additional liability policies are also available to protect homeowners from lawsuits should someone be injured on your property.
While there really isn’t a maximum amount of coverage, an insurance agent can discuss your options, there is a minimum amount of coverage that the mortgage company requires. When you finance a home your lender requires not only a new policy but also a minimum amount of coverage which is at least the cost of completely rebuilding the home. This amount is found on the property appraisal report.
This particular type of policy has nothing to do with the physical structure of the home but is a policy in favor of the mortgage company. These insurance policies are paid for by the borrowers in a couple of different ways. With a VA home loan, there is just one form of mortgage insurance called the Funding Fee, generally 2.15% of the sales price when financing 100%. This upfront premium is not paid for out of pocket but instead rolled into the final loan amount. The borrower’s monthly payment includes a portion toward this upfront premium. Should the loan ever go into default the lender is compensated for the loss of a percentage of the loan balance.
USDA and FHA loans have two separate policies. The USDA rural loan has an upfront Guarantee Fee listed at 1.00% of the sales price and is rolled into the final loan amount. There is also an annual fee (sometimes referred to “PMI”) of 0.35% of the loan amount and is paid in monthly installments. FHA loans also have two different policies. The upfront premium is at 1.75% of the sales price of the home and the annual premium based upon the amount borrowed and the loan term. For an FHA loan on a 30 year fixed rate using the minimum 3.5% down payment, the annual premium is 0.85% of the loan amount, paid monthly. All three government-backed loans require mortgage insurance both for a purchase and most refinance transactions.
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