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How Does Homeowners Insurance Work?

Key takeaway

Homeowners insurance helps protect you financially if your house is damaged, its contents are stolen, or if someone is injured on your property. Title insurance and private mortgage insurance are other types of insurance that may help protect you and your lender.

Your future home is likely to be the most valuable thing you own, and insurance is a way to protect your asset. During the homebuying process, your lender will inform you which types of insurance are required and which are optional. Here are the four most common types of insurance related to homeownership that you should know about.

1: Homeowners insurance

Covering your house, its contents, and protecting your finances if someone is injured on your property

Details of what’s covered can vary, but homeowners insurance can cover the costs of your belongings, as well as repairs due to fire, snow, wind, hail, frozen plumbing, vandalism, or theft. It might also cover the costs of a temporary place to stay while your home is being repaired.

Some types of damage related to floods or earthquakes may not be covered unless you specifically add it to your policy. If the home you’re buying is located in a flood- or earthquake-prone zone, you may need to secure additional coverage specific to floods and earthquakes.

2: Flood insurance

Covering your house, its contents, and protecting your finances from flood damage

Flood insurance covers damage to your home from flooding. It's only required if your home is in a Speclal Flood Hazard Area, which is determined by the Federal Emergency Management Agency (FEMA). Most lenders add your flood insurance payment to your monthly mortgage.

3: Private mortgage insurance

To help lenders give more people access to home loans

Private mortgage insurance (PMI) is typically required if you’re buying your home with a conventional loan but are making a down payment of less than 20% of the purchase price.

PMI protects the lender, so they are more willing to extend loans to people without the standard 20% down payment. (Remember, there may be other ways to get a home loan with a down payment amount of less than 20%.)

Removing PMI

If you can show that your home has increased in value, or you have paid down your loan balance enough, you may be able to request that your lender remove the PMI from your loan. Typically you will need to have 20% equity (the difference between the market value of your home and what you owe on your mortgage) in your home. Depending on what type of property your home is, lenders may be required to end your PMI obligation after a certain amount of time. Other factors to remove PMI include having a good payment history, the currency of the loan, and depending upon the investor, an automated valuation model (AVM).

4: Title insurance

To protect yourself and your lender against lawsuits and liens

During the homebuying process, homebuyers are also required to purchase title insurance. Title insurance protects you and your mortgage lender against possible financial losses that could occur if someone tries to claim they own the property you’re purchasing, or if there are unresolved liens on the property. The title insurance process takes place before you finish purchasing a home. Instead of being collected and paid over time, title insurance is paid in full by the buyer when your loan closes. Coverage is issued for the amount equal to the loan until it’s repaid.

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