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Homeowners Insurance
Homeowners insurance, often-called 'hazard
insurance', protects both the lender and the
homeowner in the event of a fire or storm.
Lenders require this coverage because the
home serves as collateral to cover the debt.
A homeowners policy also provides the owner
assurance that the home will be replaced or
repaired should a loss occur.
Generally, the lender will require you to
insure the property for at least the initial
amount of the loan. If you also have a second
mortgage on the home, you should be covered
for at least the total of both the first and
second mortgages.
You may want to choose an insurance company
with which you already do business. Most companies
offer a discount to those customers who have
more than one policy with them.
Typically, the first year's homeowners insurance
premium is paid at, or before, the closing
and is part of the settlement sheet. Usually
the lender will insist on escrowing subsequent
premiums, which means the cost for this insurance
will be divided by 12 and added to your monthly
mortgage payment. You will likely be asked
to bring the insurance policy to the closing
meeting with you. If you change insurance
companies, notify your lender right away.
Mortgage Insurance
Private or government mortgage insurance is
almost always required by the lender if your
down payment is less than 20 percent of the
price of the house. It protects the lender
in case you don't pay your mortgage loan.
Private mortgage insurance will pay for losses
that a lender has because of foreclosure based
on a percentage (usually 20 percent) of the
value of the property. Government insurance
provided by the FHA and the VA will pay the
lender up to 100 percent of the original loan
amount if the lender is forced to foreclose.
Neither of these programs will pay your mortgage
loan payments, they benefit only the lender
after a foreclosure.
With either private or government insurance
you will usually pay a mortgage insurance
fee at closing, and then a small monthly premium
as part of your mortgage payment.
Even though you are getting a 95 percent LTV
loan today and you must pay for private mortgage
insurance, someday your home may go up in
value or you may pay down the amount due on
your loan. This will cause the LTV to change.
When the fair market value of your house is
at least 20 percent higher than the amount
you owe, you can request to stop paying mortgage
insurance.
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