Private Mortgage Insurance (PMI)

In addition to homeowner’s insurance and title insurance, private mortgage insurance is the third insurance policy you’re likely to have in a typical closing. Private mortgage insurers are usually separate companies that specialize in insuring mortgages. They’re not connected to a government agency, mortgage company, or investor. PMI is required if you have less than a 20 percent down payment. It insures the lenders against your not making your payments and their having to foreclose. The monthly premium is calculated on a sliding scale.

A 5 percent down payment will cost more than a 10 percent down and is calculated on the loan amount. For instance, a $150,000 home with 5 percent down payment might have a .70 percent premium or $87.50 per month. A 10 percent down payment could have a .50 percent premium or $62.50 per month. Your monthly rate can also depend on your credit rating as well as the loan amount.
The PMI is supposed to drop off when the loan is paid down 20 percent. But recently, with lower interest rates and rising house values, many homeowners simply refinance and show they have at least 20 percent equity, thus avoiding the PMI.

On FHA insured loans, however, the PMI doesn’t drop off. So the strategy is to get into the house with an FHA loan and then refinance to a conventional 80–20 loan as soon as possible.

The Seller Insures the Buyer (Seller’s Policy)

Just as you paid the title company to insure the lender against the above title problems, the sellers buy a policy guaranteeing title to you as a buyer. This is normally one of the sellers’ closing costs, and their title policy typically runs about 40 percent more than the lender policy. Title insurance costs vary from state to state. Some states set the rates, others require that insurers file their rates with their state department of insurance, and some don’t regulate the fees. In Iowa, homebuyers typically purchase a title-warranty certificate from the Iowa Finance Authority. You get the same coverage as title insurance at a fraction of the cost. Ask your realtor or mortgage lender what the norm is in your state.

What Title Insurance Covers

You pay a one-time fee at closing to insure the property against the following problems:

• Forgery and impersonation
• Lack of competency, capacity, or legal authority of a party Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner)
• Undisclosed (but recorded) prior mortgage or lien
• Undisclosed (but recorded) easement or use restriction
• Erroneous or inadequate legal descriptions
• Lack of a right of access
• Deed not properly recorded
• Off-record matters, such as claims for adverse possession or prescriptive easement Deed to land with buildings encroaching on land of another Incorrect survey Silent (off-record) liens (such as mechanic’s or estate tax liens)
• Pre-existing violations of subdivision laws, zoning ordinances, or CC&Rs
• Postpolicy forgery
• Forced removal of improvements due to lack of building permit (subject to deductible)
• Postpolicy construction of improvements by a neighbor onto insured land
• Location and dimensions of insured land

As you can see, these are some heavy-duty problems that can ruin your day if they pop up unexpectedly.
For example, Jack and Carolyn bought an older home in a small town, and the tax notice described the property dimensions as 110 feet _ 140 feet. That had been the accepted dimension for 75 years and six buyers.
The new buyers decided to put up a fence, and when they measured 110 feet from the east corner, they found their lot went about 7 feet into their neighbor’s living room—A potentially messy situation. They contacted the title company that insured their sale, and they had a surveyor check out the property corners. As it turned out, the old town survey had a few problems. All the lot lines along the street had to be readjusted on the plat and new property descriptions worked up and recorded in the county recorder’s office. It turned into a severalthousand-dollar project that the title insurance covered.

Title Insurance 101

In many states, the purpose of the title company is three-fold: it sells title insurance, handles escrow funds, and does the actual closing where you go in and sign the paperwork. Other states have attorneys or escrow companies that do the actual closing. But, regardless of who does the closing, title companies still provide the title insurance coverage on your property. encroaching on the future parkway. Understandably, the new homeowners were upset and called the title company. Luckily, their insurance was with a good company and they ended up with a fair settlement.
At closing, title insurance and related settlement fees will be on the HUD statement in the 1100 section. The biggest fee on the buyer’s side of the statement will be an insurance policy you buy for the mortgage lender. This insures that the property has a good and marketable title.
Title insurance is one of the biggest yet least understood costs in buying a home. It’s one of those fees that you don’t get involved in directly. And, like homeowner’s insurance, it can have a big impact when the need suddenly complicates your life.
Charles and Kristen found this out when they thought they had bought a home on a half-acre along a river. What the seller didn’t tell them was that the county had bought an easement along the river for a parkway a few months previously. This reduced the back property line by 40 feet, and somehow the title search had missed the easement.
When they were landscaping their backyard, a county parks employee came by to stake out the jogging trail and told them they were

What is Mortgage Life Insurance?

Many people confuse mortgage life insurance with private mortgage insurance (PMI). Private mortgage insurance pays the mortgage lender in case of default. If you take out a mortgage with less than 20 percent down payment, the lender will require PMI to protect it from default. Although it sounds similar, mortgage insurance that insures you in case of disability or death is optional.
Within a few days of closing, you’ll probably get offers and brochures from your mortgage company or an affiliate offering different types of mortgage insurance.
Some policies will make the payments if the borrower becomes disabled; others will pay off the mortgage upon the borrower’s death. The question is, are these policies a good way to go? If you would sleep better at night knowing that if you become sick or disabled, your mortgage payment would be paid, then this type of policy may be worth pursuing. Compare quotes from several insurers, including the company that has your homeowner’s policy. Rates will vary widely depending on area, age, and amount. Another option available is the policy that pays off the mortgage if you die. Basically, this is called a decreasing term insurance. In theory, the rates should go down as you pay off the mortgage.
Many financial experts say that a standard term policy is not only cheaper but has more flexibility. For example, mortgage insurance would pay off the mortgage balance automatically if you were to die. A regular term policy would pay the survivors, but if they didn’t want to pay off the mortgage, they wouldn’t have to.
Here again, the best way is to check with several companies and compare rates. The company that has your homeowner’s policy may have this program and give you a cost break.

Flood Insurance—Who Needs It?

Homeowners’ policies don’t cover flooding. You can only get flood insurance from the federal government’s National Flood Insurance Program (NFIP). It boils down to this: if you don’t have an NFIP policy, you don’t have flood coverage.
FEMA’s National Flood Insurance Program: www.fema.gov/nfip/
Even though you may live outside Special Flood Hazard Area (SFHA) boundaries—also called one-in-100 years flood elevation—the low cost of a NFIP policy may still be worthwhile.
Storm drains overflow and flood adjacent areas, canals break, and new developments may channel water where it’s never gone before—your basement.
In fact, 25 percent of the 595,000 claims the Federal Insurance Administration has paid out since 1978 have been to people outside the flood zones.
To find out if your home is in a flood zone, contact your local building or planning department and ask to see the flood insurance rate map published by FEMA. If your zone designation begins with an A or V, you’re in a flood plain. And to obtain FHA, VA, or conventional financing, you’ll need proof of flood insurance prior to closing. Also, coverage is not limited to homeowners; tenants can purchase their own flood insurance policies to cover contents. Flood insurance can be purchased in any community that has agreed to adopt flood plain management programs. Currently, about 18,000 of the nation’s 22,000 cities, towns, and counties are members. Average premiums in high-risk areas are about $300 a year. The rate goes up according to the value of the property and its location. But coverage in low and moderate risk areas is as low as $85 a year.
Coverage tops out at $250,000, with an additional $100,000 for contents. The policy also covers up to $500 for removing contents to a safe location, up to $750 for sandbagging, pumping, and other preventive costs.
Flood insurance policies are sold through local insurance agents. The company that handles your homeowner’s policy can probably add this coverage for you.

Earthquake Insurance for Homeowner

Standard homeowner’s, renter’s, and business insurance policies do not cover damage from earthquakes. However, coverage is available with an endorsement or as a separate policy through most companies. Unlike flood insurance, earthquake coverage is available from private insurance companies—except in California, where homeowners can also get coverage from the California Earthquake Authority (CEA). The deductible for earthquake insurance is most often 2 to 20 percent of the replacement value of the structure, rather than a set amount. Fox example, if it takes $100,000 to rebuild a home with a 2 percent deductible, you would be responsible for the first $2,000. Insurers in states like Washington, Nevada, and Utah, with a higher than average risk of earthquakes, can have minimum deductibles of around 10 percent.
Premiums differ widely by location, insurer, and the type of structure.
Generally, older buildings cost more to insure than newer ones. Wood frame structures have lower rates than brick buildings because they tend to withstand quake stresses better. The cost of earthquake insurance is calculated on a per $1,000 basis. For instance, a frame house in the Pacific Northwest might cost between one to three dollars per $1,000, while on the East Coast it may cost less than fifty cents per $1,000.

Shopping Tips for Getting the Best Insurance Deal

Get quotes from different types of insurance companies. Some sell through their own agencies with the same name as the insurance company. Others sell through independent agents who offer policies from several insurance companies, while others don’t use agents. You can even find insurers who sell directly to consumers over the phone or through the Internet.
Consider going with a higher deductible. The deductible is the amount of money you have to pay toward a loss before your insurance kicks in. The higher your deductible, the more money you save on your premium. A deductible of $500 or $1,000 can save you as much as 25 percent.
If you live in a disaster-prone area, your insurance policy may have a separate deductible for damage from major disasters. For instance, if you live near the East Coast, you may have a separate windstorm deductible. In a state vulnerable to hail storms, a separate deductible for hail or tornado-prone area will have a deductible for that type of threat.
Buy your home and auto policies from the same insurer. Most companies that sell homeowner’s insurance also sell auto and umbrella liability insurance. (An umbrella liability policy will give you extra liability coverage.) Some insurance companies will reduce your premium by 5 to 15 percent if you buy two or more insurance policies from them. But make certain this combined price is lower than buying coverages from different companies.
Make your home more disaster resistant. Find out from your insurance agent or company representative what you can do to make your home more resistant to windstorms and other natural disasters. You may be able to save on premiums by adding storm shutters and shatterproof glass, reinforcing your roof, or buying stronger roofing materials. Older homes can be retrofitted to make them better able to withstand earthquakes. In addition, consider modernizing your heating, plumbing, and electrical systems to reduce the risk of fire and water damage.
Remember, you’re insuring the house, not the land, so you’ll need to subtract the value of the land when you calculate how much homeowner’s insurance to go with. Too many homeowners insure their home for the appraised value, which includes the land as well as the improvements. Insurance agents should point this out, but many times they don’t, because it increases your premiums as well as their profits. Check out discounts for home security devices. You can usually get discounts of at least 5 percent for smoke detectors, burglar alarms, or dead-bolt locks. Some companies may cut your premiums by as much as 15 percent or 20 percent if you install a sprinkler system and a fire or burglar alarm that rings at a monitoring station. These systems aren’t cheap, and not every system qualifies for a discount. Before you buy one do the math. Find out what kind your insurer recommends, how much the device would cost, and how much you’d save on premiums. Ask what other discounts are available. Companies don’t all offer the same discounts or the same amount of discounts in all states. Ask your agent or company representative about discounts available to you. For example, if you’re at least 55 years old and retired, you may qualify for a discount of up to 10 percent. Of if you’ve completely modernized your plumbing or electrical system recently, you may get a price break.
Check out group coverage through your employer to see if a homeowner’s policy is available and is a better deal. Also, professional, alumni, and business groups may offer insurance packages at a reduced price.
If you’ve been insured with the same company for several years, you may receive a discount for being a long-term policyholder. Some insurers will reduce premiums by 5 percent if you stay with them for three to five years, and by 10 percent if you’re a policyholder for six years or more. Still, rates and policies can and do change, so compare every couple of years to make sure you’re getting the best deal possible. Review policy limits and the value of your possessions annually. You want your policy to cover any major purchases or additions to your home. But you don’t want to spend money for coverage you don’t need. If your five-year-old fur coat is no longer worth the $5,000 you paid for it, you’ll want to reduce or cancel your floater (extra insurance for items whose full value is not covered by standard homeowners’ policies).

Factors an insurance company uses to determine the price of your policy

Some of the factors an insurance company uses to determine the price of your policy are:

• The square footage of the house and any additional structures.
• Building costs in your area
• Your home’s construction, materials, and features
• The amount of crime in your neighborhood
• The likelihood of damage from natural disasters, such as hurricanes and hail storms
• The proximity of your home to a fire hydrant (or other source of water) and to a fire station, whether your community has a professional or volunteer fire service, and other factors that can affect the time it takes to put out fires
• The condition of the plumbing, heating, and electrical system

If you rent your home or own a condo/co-op, your insurer will not consider the size of the dwelling or building costs. However, it will take into account factors that make damage to your possessions more likely, such as living in Tornado Alley or in hurricane prone areas.
The price you pay for your homeowner’s insurance can vary by hundreds of dollars, depending on the above data and the company. So shop around and get at least three price quotes. You can call companies directly or access information on the Internet. Your state insurance department may also provide comparisons of prices charged by major insurers.

Four Things You Need to Look for When Shopping for an Insurance Company

1. Price. Insurance policies and prices vary greatly from one company to another, so it pays to shop around. Get at least three price quotes from companies, agents, or from the Internet. Check with your state insurance department, it may publish a guide that shows what insurers charge in the various parts of your state.
2. Insurer stability. Make sure that the company you buy from is financially stable, so that you know they’ll be around to pay any claims. Few things are more devastating to your financial future than to have your home burn down, and then the insurance can’t or won’t handle your claim.
3. Service. The insurance company and its representatives should answer your questions and handle your claims fairly, efficiently, and quickly. You can get a feel for this by talking to other customers who have used a particular company or agent. Also check with your state insurance department to see if it has a complaint ratio that compares the number of valid complaints with the company’s share of policies in your state.
4. Availability. Whether you buy from a local agent, directly from the company, by phone, or the Internet, you should be able to contact the company or agent easily. If you can’t, consider get-ting another company. Fast and easy claim service is one of the basic things you’re paying for.

How to do Home Inventory?

Start by making a list of your possessions, describing each item and noting where you bought it and its make and model. Add any sales receipts, purchase contracts, and appraisals you have. For clothing, count the items you own by category—pants, coats, and shoes, for example—making notes about those that are especially valuable. For major appliances and electronic equipment, record the serial numbers, which are usually found on the back or bottom. If you’ve just bought a home, work up a list as you are moving in and unpacking. Items you’ll need to list are:
Valuable items like jewelry, art work, and collectibles, which may have increased in value since you received them. Check with your agent to make sure that you have adequate insurance for these items. They may need to be insured separately. Take pictures of rooms and important individual items. On the back of the photos, note what is shown and where you bought it or its make. Don’t forget things that are in closets or drawers.
Videotape your home. Walk through your house or apartment, videotaping
and describing the contents. Or do the same thing using a tape recorder.
Use your PC to make your inventory list. Personal finance software packages often include a homeowner’s room-by-room inventory program.
Regardless of how you do a list (written list, computer disk, photos, videotape, or audiotape), keep your inventory along with receipts in your safe deposit box or at a friend’s or relative’s home. That way you’ll be sure to have something to give your insurance representative if your home is damaged. When you make a significant purchase, add the information to your inventory while the details are fresh in your mind.

Importance of a Home Inventory

In case of loss, would you be able to remember all the possessions you’ve accumulated over the years? Having an up-to-date home inventory will help you get your insurance claim settled faster and verify losses for your income tax return.
Rocky and Lisa’s home was completely destroyed a few days after Christmas. A flue from their wood-burning stove developed a crack that allowed hot gases to ignite a wood beam in the ceiling. Luckily, they had gotten a video camera for a Christmas present and decided to tape their house and possessions after reading a magazine article about fire safety.
The camera was one of the few items they saved, and the video was still in it, along with some precious family footage as well. The tape saved them a lot of problems and thousands of dollars. There’s no way they could have remembered or proved everything they lost in the fire without it.