5 Types Of Insurance You Should Know About When Financing Your Home Purchase

Dated: January 13 2022

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Types of Insurance when buying a home

5 Types Of Insurance You Should Know About When Financing Your Home Purchase

Many homebuyers very frequently misunderstand Mortgage and Home Insurance because there are several types available some of which can be ambiguous. Depending on your income, credit risk, down payment, property location etc some of these insurance are mandatory requirements to get a mortgage loan.

(1) Mortgage Default Insurance

This insurance protects the lender from default by the borrower. It is a mandatory one-time insurance premium paid when buying a home with less than 25% down payment. If purchasing non-standard homes (e.g. mobile home on leased land, well and septic systems etc) a lender may not be willing to take all the risk and still require this insurance even if your down payment is 25% or more. Insurance premium is standard, and on a sliding scale depending on your mortgage loan to property value ratio (from 0.5% to 2.9% of loan amount). Because of this insurance many people who could not afford a home in the past because of the minimum 25% down payment requirement can now purchase a home with only 5% (sometimes even 0%) down payment.

(2) Mortgage Life and /or Disability Insurance

This one ensures that the mortgage will be paid off in full by the insurer in the event of the death or disability of the borrowers. It is not mandatory but is particularly important if you are the beneficiary and have dependants to inherit your home when you die to prevent foreclosure on your home. Premiums depend on your age, health, mortgage amount and are usually paid monthly.

(3) Mortgage Payment Protection Insurance

In the event that the borrower cannot make the mortgage payments due to loss of employment, disability or death, this insurance ensures that mortgage payments will continue to be made (by the insurer) . Premiums depend on your age, health, mortgage amount and are usually paid monthly.

(4) Title Insurance

This one protects against any disputes over ownership of the property and some lenders require it. A one-time premium of about $250 is paid at closing. Lender's title insurance covers the lender if there are any questions about ownership or liens against the property. Owner's title insurance protects the owner.

(5) Homeowner’s Insurance

This is the type of insurance that you probably already know about. It covers your home, its surrounding structure, sometimes your personal possession inside the home and any resulting liabilities from a wide variety of perils like fire, wind or other destructive force.  However, there are several types of homeowner's policies, each cover your house to a different extent and certain perils may not be covered. Most lenders require this insurance to be in place before granting final approval of your mortgage

Whether or not you should purchase non-mandatory insurance and the extent of coverage depends on your personal circumstances. Seek advice from your mortgage consultant.

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Neville Adomi

WHAT DO I DO? - I am passionate about helping my clients have a memorable experience when they buy and/or sell their homes. Moving to a new home is one of the most stressful experiences for most peopl....

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