The Two Different Types of Home Insurance Explained1/18/2011 There are two types of “home insurance” you’ll encounter during the home purchase process. One of them you need. The other one you should try to avoid, if you can. Homeowner’s InsuranceThis type of insurance protects your home against the cost of damage resulting from natural disasters, crime, and other harms. The scope and range of your coverage depends on your plan and the area in which you live. This is good insurance to have, and any first time home buyer would be wise to obtain it immediately after closing on the home. Private Mortgage Insurance (PMI)This type of insurance is designed to protect the bank against the risk that you’ll default on your loan. But you, the homeowner, must pay for it. PMI is required for all loans in which the borrower makes a down payment of less than 20% of the home purchase price. You’ll also have to pay for PMI if you’re taking out an FHA mortgage. If a home buyer has a low credit score or low cash reserves, he or she may be required to pay for private mortgage insurance in some cases. You should try to avoid this insurance at all costs. |
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