A home is by far the largest monetary investment that most of us will ever make. More than just a collection of wood, brick, nails and screws, our homes are our refuge, our safe-haven, and we want to protect that don’t we? Property insurance is one way to protect that investment. The sheer number of different types of insurance policies can become overwhelming in a hurry. Let’s break it down to what you absolutely need and what you can pass by.
There are some states that do not require buyers to have title insurance and if you pay cash, some other states do not consider them mandatory. Regardless of the law, you need title insurance.
Title insurance specifically protects the property owner against fractures in the chain of title, title defects, undiscovered liens and other matters regarding legal ownership. For example, let’s say Grampa Joe wills his house to his three daughters. The daughters don’t want the house and decide to sell it to you, but only two sign off on the house. No one catches it until you decide to sell that house 15 years later. Now the title cannot transfer until you track down the missing daughter and get her signature. Title insurance handles it all for you and covers the cost.
Here is another example, say you bought a short sale but they missed a contractor’s lien at closing. Well, without title insurance the contractor can come after you as the legal owner. Now doesn’t that sound like fun?
If you have a mortgage, then this is an absolute requirement. But, if you paid cash or paid off the mortgage, you may be tempted to stop paying homeowner’s insurance on that old 1950’s house. Don’t. You need homeowners insurance. Think of the risks: electrical fires, lightning strikes, flooding, hail damage, vandals, burst pipes while on vacation – the list is endless. While coughing up $700 a year might hurt, it will hurt a lot less than losing the whole value of your home.
If you live in a hurricane or flood-prone areas, then flood insurance is important. A common mistake is that homeowners opt for wind damage riders on their homeowner’s policy and think they are covered in the event of a hurricane. If the hurricane brings a storm surge and 3 feet of water ends up in your house, a wind policy will not cover your damage.
Private Mortgage Insurance (PMI)
PMI covers your lender’s investment in your mortgage in the event you default on your loan. Because you caused the risk, the lender has decided to make you pay for it. If you put at least 20% down on your purchase, however, you do not have to pay the mortgage insurance. How much will you save? A lot.
Private mortgage insurance will cost you between 0.5% and 1.5% of your original loan amount annually. That means that if you have a $200,000 loan, you could be paying up to $3,000 a year or an extra $250 a month – especially if you went the popular FHA route. Ouch. Why not wait a little longer and save up that 20%, your monthly budget will thank you.
Insurance is a risk reduction policy. While it may hurt the budget to pay for these policies, if a disaster strikes either legally or physically, having title insurance and a good homeowner’s insurance policy will save you thousands in the end.
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