What The Heck Is Homeowners Insurance?

The journey to homeownership is no easy trek. There will be an endless list of new terms and information that come up during the loan process, and even afterward. An important part of being a homeowner is knowing the ins and outs of homeowners insurance.

A standard homeowners insurance policy will provide you with financial protection in the event of a disaster or accident involving your home’s structure and belongings inside. Let’s look at some common questions about homeowners insurance and break it down together.

Is homeowners insurance required?

Technically, homeowners insurance is not required by law. However, most lenders will require you to have at least some form of basic insurance to fund a loan. Once you pay off your mortgage and you own the home outright, you don’t have to keep your insurance. But there are plenty of reasons to keep it.

What does homeowners insurance cover?

Your homeowner’s insurance will reimburse you for living expenses if you’re forced to live outside of your home during repairs, in addition to the home and personal property coverage. (Given the cause of damage is a covered peril in your policy.)

 

A named-peril policy will only cover the perils specifically outlined in your policy. An open peril policy will cover everything except the hazards specifically listed in your policy.

There are eight different forms of homeowners insurance, but there are five options for basic homeownership (not a condo or mobile home, etc):

HO1: Basic Form (Limited Coverage Policy)

This form of homeowners insurance offers the most limited coverage. Because it’s a named peril policy, only the perils outlined in your policy are covered. Perils:

Fire/Lightning

Windstorm/Hail

Vandalism

Malicious mischief

Vehicles

Aircraft

Explosions/Riots

Glass breakage

Smoke

Volcanic eruption

Personal liability

HO2: Broad Form (Basic Policy)

All perils listed under HO1 are included in this form, in addition to:

Falling objects

Weight of ice, snow, and sleet

Accidental discharge or overflow of water/steam

Sudden and accidental tearing apart, cracking, burning, bulging

Freezing

Sudden, accidental damage from artificially generated electrical current

HO3: Special Form (Most Common Policy)

This is considered the most common type of homeowners insurance because of its broad range of coverage, and the fact that it’s generally still affordable for homeowners. HO3 is an open peril policy. Some common exclusions you will see on an open peril policy include:

Earth Movement

Ordinance of law

Power failure

War

Nuclear hazard

Government action

More

HO5: Comprehensive Form

An HO5 policy will cover more perils than the previous types listed. Similar to an HO3, an HO5 is an open peril policy. Whereas an HO3 policy has named perils for personal property, HO5 policies are open peril for both the dwelling and personal property.

HO8: Older Home Form

This form of homeowners insurance is designed for homes built more than 40 years ago and don’t meet all of the structural update requirements found in HO3 policies. HO8 policies are peril plans that provide the same basic coverage as HO1 policies.

Most basic forms of homeowners insurance will not cover flood or earthquake damage. A standalone policy may be needed for your home if you live in areas prone to these types of damage.

How much does homeowners insurance cost?

The average premium for homeowners insurance in 2016 was about $100/month ($1,192 annually.) However, your cost will vary on location, provider, and extensiveness of the policy.

It’s important that you don’t confuse homeowners insurance and mortgage insurance. Homeowners insurance exists to protect the homeowner in the event of damage to your home. Whereas mortgage insurance exists to protect the lender in the event that you (the borrower) cannot repay your loan.

How do I buy homeowners insurance?

When it comes time to buy insurance, there are a few important steps you have to take before you go shopping. First, you’ll need to get a replacement cost estimate of your home from a certified appraiser. This estimate will help ensure you get the most from your insurance policy.

Next, you should take inventory of your personal items, including any valuables you may need coverage for. To understand just how much coverage you’ll need, combine your total assets.

It’s no secret that you should never go with the first company you find. So, take time to do your research, and ask people you know for recommendations. You should also get multiple quotes and check for possible discounts.

Are you ready to begin the homeownership journey? Contact Your Home Loan Experts, The Polder Group at Summit Funding.

 

How And When Private Mortgage Insurance May Be Canceled

Private Mortgage Insurance (PMI) is required for many home buyers who do not have the full 20% down payment to purchase a home. It costs between 0.20% to 1.50% of the balance on your loan each year, based on the borrower’s credit score, down payment and loan term. The annual cost is added to the monthly mortgage payment.

What is PMI?

PMI is insurance which reimburses the lender in the case the borrower defaults on the home loan. It also allows borrowers to refinance their home even if they do not have 20% equity. This is not the same as homeowners insurance, and this insurance does not pay the mortgage if a borrower loses their job. This is simply a way for your client to get into a home without needing to put 20% down to purchase a home.

How do I cancel PMI?

According to the Homeowners Protection Act, a borrower has the right to request the cancellation of their PMI on the day the mortgage falls to 80% of the original value of their primary residence. However, there are other important criteria which must be met to cancel PMI:

  • PMI cancellation requests must be in writing.
  • Homeowner must be current on mortgage payments with a good payment history.
  • Homeowner may have to show there are no other liens on the home (for example, a home equity loan or home equity line of credit).
  • An appraisal may be required to demonstrate the loan balance isn’t more than 80% of the home’s current value.

We are always here to help foster your client relationships and assist in their continuous education. If you have any questions, call or email The Polder Group with Summit Funding!