By Acme Homes 1-19-2022
At Acme Homes, we love helping first time homebuyers navigate the confusing world of purchasing a home. Afterall, the home buying process is rife with new and cryptic terminology that can be difficult to make sense of at first. Two terms that you are likely to come across, for example, are private mortgage insurance and homeowners insurance. At first glance, these sound quite similar, but they are not. We want to help you understand the difference between these two terms along with why you may need them.
PMI (Private Mortgage Insurance) Protects the Lender
Private mortgage insurance, or PMI as you will often see it, is put in place to protect the lender. Banks are always making educated gambles when they choose to work with someone. They consider things like your credit score, your spending habits, and your income to calculate if it is within your means to repay them and how likely you are to do so. A 20 percent or more down payment on a house will already guarantee that the banks will not lose too much money if you are unable to repay the loan. But as is quite often the case with first time homebuyers, a 20 percent down payment is incredibly difficult to come up with. When you put down less than 20 percent down on a home, lenders protect themselves by requiring PMI. This will be a small fee on top of your monthly mortgage payment.
Homeowners Insurance Protects the Borrower
Whether you opt for a 15-year or a 30-year mortgage, that is a long time to be repaying a loan. A lot can happen in that span of time. Natural disasters are ever increasing, and you cannot account for burglaries, arsons, or major damage that could befall your property over the years. If your home was to be irrevocably damaged and yet you still had to juggle rebuilding the home and paying for the one that was lost, this would be an unbearable burden. That is where homeowners insurance will lessen that burden. In the event that your home is hit by disaster, the insurance will pay to repair or rebuild it. Of course, this insurance does not cover normal wear and tear on a house. You still need to properly maintain it.
Do You Ever Stop Paying For PMI or Homeowners Insurance?
You do not have to pay PMI indefinitely. Once you have paid off 20 percent of your mortgage, you are eligible to request that PMI payments be dropped.
Homeowners insurance will still benefit you even after your mortgage is paid off. Like anything of value, having it insured will offer you protection and peace of mind.