Private mortgage insurance is something millions of homeowners pay for each year. However, this type of insurance does not protect the homeowner.
Mortgage insurance is designed to protect the lender. If the homeowner were to default on the loan, the mortgage insurance would pay off the loan to the lender, but the homeowner would still lose their home.
So, is mortgage insurance a requirement? Believe it or not, mortgage insurance is only required for specific types of mortgages.
If you don’t have a lot of money saved up to put towards a home, you can still secure a mortgage. In fact, with an FHA mortgage, you can qualify by putting down 3.5% of the home's value in the form of a down payment, so long as you meet the current requirements.
However, the less money you put down on a home, the riskier lenders tend to consider you to be. To make a lender comfortable with lending you money, they may require you to purchase mortgage insurance. This insurance is often referred to as private mortgage insurance, or PMI.
Even though you’ll be paying for mortgage insurance on a monthly basis, you are not the beneficiary. You’ll be paying this expense on behalf of the bank, making the bank the beneficiary.
If you default on your loan, you will still lose your house. However, the bank will receive the money they are due thanks to the mortgage insurance.
Unfortunately, there is not a one-size-fits-all approach to mortgage insurance. Your monthly mortgage insurance payment will depend on how much money you put down on your home and what type of mortgage you originally used to finance your home.
For example, FHA loans have a different PMI rate compared to conventional mortgages. On average, mortgage insurance will cost you anywhere from 0.35% to 2.25% of your loan amount.
Let’s review the pros and cons of mortgage insurance.
By paying mortgage insurance, a homeowner can likely purchase a home with a less substantial down payment. For example, saving up for a 20% down payment on a $300,000 home is difficult, whereas saving up for a 3.5% down payment on the same home is probably easier.
If there wasn’t mortgage insurance, banks would not likely be comfortable lending money to a homebuyer who just puts down a 3.5% down payment. In this way, mortgage insurance has helped people secure loans that they previously would not qualify for.
Mortgage insurance does not protect the homeowner, it protects the lender. Depending on the type of loan you purchased, mortgage insurance can be with you for the life of the loan.
This can add up to a great deal of money, and again, the homeowner does not get the protection. Mortgage insurance takes money out of your pocket each month, increasing the cost of owning a home.
Needless to say, most people would prefer to save $100-$200 per month, instead of paying for insurance that does not protect them.
Conventional mortgages do not always require mortgage insurance. In fact, you’ll just pay PMI on a conventional mortgage if your down payment isn’t at least 20%. If your down payment is less than 20%, you will be paying mortgage insurance on a conventional loan.
If you are financing via a conventional mortgage and do in fact need PMI, you can request the lender drops the PMI once you reach 20% equity in your home.
FHA loans require mortgage insurance. Generally speaking, an FHA loan is used in the following situations:
FHA loans are guaranteed by the United States Government, and require mortgage insurance in case the homeowner defaults on their loan
If you are in an FHA loan, you can always refinance to a conventional loan once you build equity in your home. By refinancing your mortgage you may be able to save quite a bit of money on mortgage insurance.
VA loans do not require PMI. This is one of the greatest benefits of a VA loan. The government still backs VA loans, but as a thank you to our veterans, the government and lenders do not require the individual or family to carry mortgage insurance.
There are several ways to avoid paying for mortgage insurance. The most common options include:
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Without question, mortgage insurance has helped millions of people qualify for homes they otherwise would not be able to. However, beyond the initial qualification, mortgage insurance feels more like a financial drain than a benefit.
Remember, PMI does not protect the homeowner, but rather protects the bank if the homeowner defaults on their mortgage. PMI is a requirement for specific loans, but not all of them. Be sure to review all the various loan options available to you before deciding which loan is right for you.
When you buy a house and start making mortgage payments, your payment consists of four different components, known by the acronym PITI, which refers to Principal, Interest, Taxes, and Insurance. The insurance component can include PMI (private mortgage insurance) and homeowners insurance. Each of these concepts would take an entire article to explain, but we’ll be focusing on homeowners insurance in this blog post. If you’ve bought a house or are preparing to buy one, this article will provide a thorough overview of what homeowners insurance is, why you have to have it, what it covers, and ways to bring the costs associated with it down.
What is homeowners insurance, and why is it necessary that you pay for it? Essentially, homeowners insurance protects you if your home or possessions in the house are put in jeopardy by a natural disaster, robbery, or some other unexpected event. In addition, homeowners insurance protects lenders by allowing you to continue to make mortgage payments in the event of a crisis and protecting the property for which they have a financial interest in until the mortgage is satisfied. In most cases, proof of homeowners insurance is a mandatory requirement from mortgage companies.
Homeowners insurance includes property insurance, which protects your actual home and property in the event of a fire, theft, or other unexpected events, but it also includes liability insurance. Liability insurance protects you legally if someone who’s not on your policy is affected by your property or while on your land. Examples of this could include someone falling and getting hurt on your property or a tree planted on your land falling on someone else’s house—though the liability in both of these examples would depend on the exact details of the event and is determined on a case by case analysis. Because home insurance includes two types of insurance bundled together, it’s known as multi-line.
Not all homeowners insurance policies look the same. Depending on your situation and needs, your policy could look completely different from someone else’s. Here, we’ll go over several different types you might encounter and what they cover.
Homeowners insurance is just as much a protection for you as it is for your lender, so it’s natural to want to know what exactly it covers. While the exact coverage will depend on your policy, there are some common things that you can expect to see home insurance guarding you against.
First, homeowners insurance, depending on the policy, may protect your house, inside and out, from disasters like fires and smoke damage, explosions, falling trees, aircraft damage, and even destruction from a burst pipe. If you neglect the upkeep of your home and experience damage due to that, homeowners insurance may find you at fault and this can affect your coverage. Homeowners insurance also generally covers not just you but the property in your house. This can be comforting if you worry about the possibility of a burglary. Depending on your policy, homeowners insurance may also cover damages for injury to people on your property in the event of an accident. Finally, if a disaster happens to displace you temporarily, your insurance might also cover day-to-day expenses, including lodging and food, within reason.
We’ve discussed what home insurance covers in brief, but let’s break it down even further so you can understand exactly what to expect.
The first section in your policy is all about you—your house, your possessions, and your well being when disaster strikes.
Dwelling refers to the actual physical makeup of your home. Insurance companies will want to consider how expensive it would be to repair or entirely rebuild your residence in the event of a disaster.
The items in your house can carry substantial value, which is why many homeowners insurance policies cover them as well. For people with especially high-value items, such as jewelry or rare collector items that they own and treasure, extra coverage might be a good idea.
As we discussed before, some disasters can drive you out of your home for an extended period. Luckily you won’t have to pay for lodging costs during this time if you have the right coverage.
Many potential accidents could happen on your property or as a result of something on your property: your pet could harm someone, a tree branch could break off and damage your neighbor’s car, and the list goes on. The liability section exists to safeguard you from the financial burden of any repairs or payments that arise because of such events.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
When you’re ready to buy homeowners insurance, do your research. Determine what type of insurance you need, your home-rebuilding price, the items in your home that need to be insured and how you want them to be covered, and more. Consult with an insurance agent or a realtor as needed. If you live in a place that’s likely to flood or have earthquakes, you may want to ask about buying additional insurance just for this eventuality.
Before binding yourself on a policy, be sure to compare prices from several different companies to ensure you’re getting the best homeowners insurance premiums and coverage.
Your situation isn’t the same as your neighbor’s, so you likely won’t pay the same as they do on their homeowners insurance. If you are wondering, “How much is homeowners insurance going to cost me?” know that insurance businesses consider several details when calculating how much to charge you. Some factors have to do with the home itself, while others take into account your lifestyle choices. Here are some of the main factors that may go into how much your homeowners insurance premium rates:
Most people want to cut costs wherever they can, especially when you’re dealing with the already pricy business of buying a house. Some ways that you can keep your premiums as low as possible without skimping on the quality of your insurance include:
Overall, while homeowners insurance may be a requirement, it’s also a smart thing to purchase to protect you and your property from unexpected events that can cause damage. If you’re looking for the right homeowners insurance company to safeguard your next real estate investment, an insurance agent can help you explore policies and customize them for your needs.
People buy their homes for a number of reasons. Affordability, stability, and comfort are some of the most important factors. However, appreciation must also be considered when you’re thinking about buying, selling, or refinancing a home.
Understanding home appreciation is essential for homeowners. Knowing how home appreciation rates work and what they are in your neighborhood can help you to make the best choices for your financial security.
In real estate, appreciation refers to the increase in value of a piece of property over time. An increase in appreciation for a home can stem from several factors. Some of these factors have nothing to do with the home itself, but instead, they relate to the area around the home.
For example, increased job opportunities and growth in an area can help to increase average home appreciation in an area. When a new factory is opened nearby, there may be increased demand for homes in the area so that workers can enjoy a quick commute. This increased demand can lead to higher sale prices for the neighborhood, even if the homeowners haven’t changed anything about the homes that they’re selling.
However, homeowners can also affect their home’s appreciation. The best way of doing this is by investing in your home and making improvements.
Average home appreciation rates are the rates at which homes increase in value for a given period of time. These rates will vary over time, but typically, they do not shoot up drastically. The rate of appreciation depends largely on location.
This is because the land on which your home sits is the one thing that cannot be changed about your home. When there is increased demand for homes in your local area, average home appreciation rates go up.
There is one factor in particular that can affect appreciation rates in locations across the United States: the economy. In a strong economy with greater spending, house prices tend to go up. However, the state of the economy is not the only influencer. Inflation can have the ability to increase and decrease the value of homes, as well.
Because inflation can affect the loans that potential home buyers may qualify for, they can also change the size of the pool of potential buyers, which can affect the balance of supply and demand in the market.
In the United States, the average appreciation rate for a home is between 3 - 5%. In the last 25 years, the average appreciation rate for a home in the United States was 3.9%.
There is a limited supply of land in any given area. The land that your home sits on becomes more valuable over time, as there are fewer building sites available. This is especially true when the land around you has been developed into restaurants, retail spaces, suburban tracts, and more. In areas that become more desirable over time, average home appreciation goes up.
Home appreciation rates inform homeowners about what they can expect to sell their homes for at any given time. Higher appreciation rates mean that a homeowner can expect to sell their home for more than what they bought it for. Lower appreciation rates lead to properties that decrease in value.
A positive appreciation rate is something all homeowners should strive for. When you’re able to sell your home for more than its original purchase price, it can make it possible for you to upgrade to a larger home, pad your savings account, or help you to pay off debts with the excess.
Appreciation is best understood as a percentage.
If you would rather avoid calculations, the U.S. Federal Housing Finance Agency has a House Price Calculator that can assist you in determining your home appreciation value.
Because you can’t control the local market around you, for homeowners, the only way to keep home appreciation rates high is to maintain your home and keep it up to date.
To enjoy a high appreciation value, homeowners can do projects such as these:
Maintaining your home’s exterior keeps it looking fresh and clean. It may seem simple, but even just a fresh coat of paint can help to enhance your curb appeal and protect your investment.
When they’re looking for a home, buyers usually want something that is updated to modern standards. Keeping the interior of your home clean, operational, and up-to-date can add thousands of dollars in value when it’s time to sell.
Energy efficiency is another valuable factor home buyers look for. Increasing your home’s efficiency can lower your gas and electric bills. Homebuyers are often willing to pay more for energy-efficient homes, as they understand that they’ll pay less in monthly utilities with an upgraded home.
Smart homes make life easier, which has made them popular among buyers. Adding more advanced technology like newer thermostats and security systems can add value to your home.
Square footage is one of the biggest selling points for a home. Adding square footage is not the easiest way to add value to a home, but adding structures like a deck or a guest house will almost always add thousands of dollars in value to your home.
You cannot always control what goes on around your home, but keeping your home up-to-date, looking good, and functioning properly will add value and increase appreciation.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
So what is home appreciation? It’s the increased property value of your home over time. Because the trend for homes in the United States is currently about 3-5% in appreciation, this means that most homeowners will see their home’s value increase in the long run. However, to maximize home appreciation, homeowners need to do their part.
For more information about home appreciation for your specific property, contact one of our agents today! We can help you to understand the current value of your home and the ways that you can increase that value.
*Does not apply to third party fees and closing costs.
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