By Broderick Perkins
Lenders won't let you close the deal on your home purchase if you don't have home insurance, but that's likely not all the coverage you'll need.
No one likes to buy insurance, but, compared to what you'd have to pay if you don't have the coverage when you need it, the cost of protection is a steal.
And it's for a worthy cause. Your home is likely your most valuable asset.
Take a cue from your lender.
Lenders demand coverage to protect them, say if after a disaster, you decide to walk away from your investment. Even if you can afford to pay cash for your home, you should still insure it unless you are also rich enough to buy another should the need arise.
Home insurance covers your home and your personal property it stores against losses from fire or lightning, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, theft, glass damage and, yes, volcanic eruption.
That almost covers all the bases.
You should insure your home and your belongings for their replacement value, not the market value (which includes the land) and not your belonging's depreciated cash value. That will give you enough coverage to rebuild your home and replace your stuff at the time your loss occurs. Automatic inflation adjustment riders are also wise to make sure replacement cost coverage keeps pace with the growing economy.
It's important to read the small print to determine what's covered and to assess your needs. You could need additional special coverage for jewelry, furs, computers, landscaping and other items whose replacement might exceed your coverage limits or isn't covered by the primary policy.
Basic home insurance policies also protect you from liability, say if someone is injured in your home or on the property.
To keep your costs affordable (and they vary widely depending upon the age, size, condition and location of your home), without skimping, shop around for the best company, raise your deductible, buy a newer home with the latest code-complying construction, improve your security and safety systems, consider discounts for seniors and group coverage and consider buying all your insurance -- home, auto, life, etc. -- from one insurer for the multiple policy discount.
Your lender could also require flood insurance, available from the same agent or company that sells you your home policy.
Federal law makes the coverage mandatory if your home is in a federally designated high flood risk zone within a flood plain and you are signing for a federally insured mortgage or want to remain eligible for certain types of federal disaster assistance after the president declares a major disaster.
When you buy flood insurance, the basic policy covers your home's foundation, flooring and walls. You must purchase separate coverage for the contents, if you want it. The structure and contents of garages, sheds and similar structures can be insured, but only up to 10 percent of the policy limit.
You can purchase the insurance even if you aren't in a high flood risk zone, provided your community participates in the National Flood Insurance Program.
Quake insurance isn't mandatory, but consider the coverage if you buy a home near a fault line. Also consider it in earthquake areas if your home sits on a slope, hill or atop soils prone to liquefaction during a quake. You may need a geologist or soils specialist to determine your risk. In California, all insurers that comprise the California Earthquake Authority offer the same group of policies at the same rate for each, but non-CEA insurers offer a variety of coverages for a variety of prices. Shop around.
Lenders also require you to buy title insurance when you open escrow to assure that the property you are about to buy has a title that is free and clear of encumbrances, liens, judgments, claims of ownership and other events that happened in the past. The one-time (unless you refinance) cost is spent researching the title to make sure the home truly belongs to the seller. In some areas, sellers pay for title insurance. In others, buyers foot the bill. Also, depending upon the community, coverage varies. In some cases, the buyer and the lender are protected by one policy. In other areas, two or more policies could be necessary. Title insurance fees also vary. Comparison shop for this coverage too.
Private mortgage insurance
Lenders directly levy what's called "private mortgage insurance" (PMI) if your down payment is less than 20 percent of the home's value. The coverage doesn't protect you, it protects the lender from you defaulting on the mortgage. That appears questionable, but if you can't come up with 20 percent down, it gets you in the door. Studies show that those who put less down and have a smaller stake in their home are more likely to default than buyers who plop down larger down payments.
However, private mortgage insurance abuses led to a new federal law effective July 29, 1999 which says, for loans written on or after that date, lenders must automatically cancel PMI when your mortgage balance shrinks to 78 percent of the home's original purchase price.
You may apply to have the insurance removed when the balance reaches 80 percent of the purchase price, provided there is no second mortgage on the property.
There is no federal provision for removing PMI due to value appreciation, but under no circumstances can the lender retain PMI once your loan reaches its half-way amortization point. That's 15 years on a 30-year mortgage.Some Freddie Mac, Fannie Mae, Federal Housing Administration (FHA), Veterans Administration (VA), other loans deemed high risk and loans with lender-paid (in the form of a higher interest rate) PMI have different PMI rules and governing legislation.
Some states also have laws that were not superseded by the federal law.
Because PMI coverage is assigned by your lender, there is no real way to shop around for it except shopping for other mortgages to compare their PMI premiums.
Be sure you know your rights in your state, and scrutinize PMI deals that finance your premiums along with your mortgage. The loan rate generally costs more to cover the insurance and when the cost is financed or otherwise "lender-paid" it's often exempt from the federal law.
Broderick Perkins, has been a consumer journalist for 20 years. Experienced in print, electronic, and consulting journalism, he is chief executive editor of San Jose, CA-based, DeadlineNews.Com, an editorial content and consulting firm.