When buying a new home, you’ll likely find that there are many more costs associated with real estate transactions than you initially realized. One of the biggest additional costs many buyers run into is insurance. While it may be confusing to try to understand all the different types of insurance, it’s important to do your research and make sure you are well-covered in case of unforeseen circumstances.
1. Homeowner’s Insurance
In its most basic form, homeowner’s insurance covers the structure of your home and your belongings in case of a destructive event, like a fire or tornado. However, almost all homeowners’ insurance will also include liability coverage. That way if someone gets injured on your property, your homeowner’s insurance will help to pay for their medical costs. Liability insurance can cover incidents outside of your property too, depending on your policy.
Keep in mind that your lender will likely require pre-payment of the first year of homeowner’s insurance at closing.
2. FHA Mortgage Insurance
If you’re using an FHA loan to fund your mortgage, you will be required to pay a UPMIP – Upfront Mortgage Insurance Premium. This is typically 1.75% of the base loan amount and must be paid at closing. You will also have monthly MIP (Mortgage Insurance Premium) payments, which may vary based on your loan’s term and amount.
3. Private Mortgage Insurance
If you are looking to buy a home but aren’t able to afford a 20% down payment, your lender may require PMI, or Private Mortgage Insurance. Because you haven’t invested as much in the down payment, your lender may view your home loan as “riskier” – the PMI helps to protect your lender if you were to default on your loan payments.
4. Title Insurance
A title insurance policy helps to protect the lender if someone were to challenge the ownership of the home. The most common occurrences of this are faulty paperwork, undisclosed heirs, or unpaid liens. The seller may also have their own, separate title insurance policy. The cost of title insurance is typically a one-time fee between .5% - 1% of the sale price.
While all buyers (and sellers) hope to have a smooth, simple real estate transaction, unfortunately, that isn’t always the case. While you may be tempted to get the lowest-cost (and therefore lowest coverage) policies – or forego optional insurances altogether – consider the possible risks of insufficient coverage. You may find that it still makes financial sense to pay a little more now to protect you from potential costly problems down the road.
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