Blog

Home Insurance vs Mortgage Insurance

Home Insurance and Mortgage Insurance

Many homeowners with mortgages pay for both types of insurance but only one of them protects the owner.

Homeowner’s insurance covers damage to your property and losses from fire, burglary, vandalism, and other named natural disasters.  When an insured has a loss, they file a claim with the insurance carrier which would be subject to the deductible mentioned in the policy.

If the homeowner has a mortgage on the property, the lender will require that the borrower carry adequate insurance on the property and name the lender as an additional insured.  This protects the lender that the home will continue to be sufficient collateral for the loan in case of a loss.

Mortgage insurance is not like homeowner’s insurance in that it is solely for the protection of the lender if the borrower defaults on the loan.  Usually, lenders require mortgage insurance on any loan greater than 80% loan-to-value.  Occasionally, they may require it on some loans less than 80% based on their underwriting requirements and possibly, from anticipated risk from the borrower.

VA loans do not require mortgage insurance.  Conventional lenders must remove the mortgage insurance when the loan amortizes below the stated percentage.  FHA loans require mortgage insurance for the life of the loan.

When a property appreciates so that when the owners refinance, the loan-to-value ratio is less than 80%, no mortgage insurance would be required.  This can be a strong motivation for some owners to refinance to save the cost of the mortgage insurance.

Mortgage insurance premiums are not regulated by law like homeowner’s insurance is in most states.  Most buyers are concerned about the interest rate on their mortgage, but few question the amount of the mortgage insurance premium.

The homeowner can select the carrier for his homeowner insurance, but the lender determines the carrier for the mortgage insurance.  When you are interviewing lenders, the type of insurance that will be required and the price of the mortgage insurance should be included in the discussion.

Selling and Buying Real Estate

Moving UP or DOWN

Staying at home in 2020 caused of lot of owners to think about how nice it would be to have a larger home to accommodate the additional activities that come along with isolating.  Particularly for people with children at home or possibly, the potential of either adult children or parents coming to live with them.

There are other owners who are trying to weigh the pros and cons of selling their larger home and downsizing.  For entirely different reasons, the advantages could be very appealing to an owner.  A smaller home is easier to maintain and usually, has lower utilities, insurance, and property taxes.

Some people might be considering the convenience and ease of mobility of a single level home.  It may be finding a location with proximity to the activities they are now interested in.  A newer home might have less maintenance and be more energy efficient.

Married taxpayers who have owned and occupied a principal residence for two years can exclude up to $500,000 of capital gain while a single taxpayer can exclude up to $250,000.  Liquidating the equity in their home without a tax liability could have multiple benefits.

Some people might choose to pay cash for the replacement home.  Others might put 20% down to avoid mortgage insurance and possibly, even get a 15-year loan to get the lowest rate.  The balance of the equity could be invested at a rate higher than the interest on their new mortgage.  Still, others might want to have some reserve funds available for whatever the next unanticipated crisis might be.

It could be a way to fund a longtime goal like children’s or grandchildren’s education, or wedding, or a once-in-a-lifetime trip.  Maybe part of the equity could be used to start a business or make a grant to a worthwhile charity.

Selling a home and purchasing another will have expenses involved that have to be taken into consideration.  Purchase costs could be 1.5 to 3% while sales expenses could be easily be 2.5 times that much.

Regardless of whether it is moving to a larger home or a smaller one, now is a good time to make the move.  Due to the low inventory in most markets, homes are selling quickly, many times, in less than three weeks.  Normally, the winter months have less activity which means less competition also.

And then, there are the mortgage rates.  As of 1/21/21, the 30-year fixed rate was at 2.77% and the 15-year at 2.21%.

Like any other big change in life, it is recommended that you take your time to consider the possible alternatives and outcomes.  Your real estate professional can provide information that can be valuable in the discernment process such as what your home is worth, what you will net from a sale as well as, alternative properties for your next stage in life.