When you are buying a home, there are many different insurance policies you will have to purchase. Some of them will be required by your lender or the local laws, while others are simply good to have when you are dealing with such an expensive asset as a home. As a New Jersey title company, we often get questions from first-time home buyers confused about title insurance and mortgage insurance—the two policies people don’t really hear about until they are ready to buy. To eliminate any confusion, we are happy to explain how both of these types of insurance work.
What is Mortgage Insurance?
Mortgage insurance is meant to protect the bank if you default on your loan. This way the lender will still get paid if you fail to keep up with your mortgage payments. Not every home buyer is required to purchase mortgage insurance—only the buyers who are not offering a down-payment in the amount of 20% of the home’s value. In case of a government loan, the mortgage insurance may be required regardless of the down-payment.
There are two types of mortgage insurance:
- If you have a VA or an FHA loan, you will buy your mortgage insurance from the government.
- If you are using a private lender, then you will have private mortgage insurance (PMI).
PMI allows you to purchase a home even if you don’t have the full 20% down-payment saved up just yet. You will have to pay PMI until you bring your debt down to 80% of the home’s value. The cost of mortgage insurance depends on your credit score, as well as the amount of the down-payment. It may add an extra $30 to $150 a month to your mortgage payment. If you are dealing with a government loan, there could be an upfront fee instead of monthly premiums.
How is Title Insurance Different?
Title insurance is issued to protect the rights to home ownership. It may cover a variety of title defects, including such possible issues as past liens against the property, undisclosed heirs and improperly recorded deeds. Once your home’s title is insured, you can have a peace of mind that if any issues are to arise in the future, you are protected.
There are two parts to title insurance:
- The lender’s policy protects the lender’s interest in the property until the mortgage is paid off. The premium for this policy is based on the amount of the loan.
- The homeowner’s policy protects you, the homeowner, and the premium is based on the purchase price of the home.
The premiums for both policies are usually paid as a lump sum during closing. The lender’s policy is required in most states for buyers who take out a mortgage. Even if you are financing your new home without a mortgage, it’s still recommended that you purchase title insurance. If there is a problem with the title down the road, the title company will be responsible for fixing it. All of your litigation expenses, as well as monetary losses will be covered by the title insurance.
As you can see, mortgage insurance and title insurance are really different. Mortgage insurance protects the lender, while title insurance protects both the lender and the homeowner. Mortgage insurance has to do with your inability to pay off the loan and title insurance protects your rights to home ownership.
Are you looking for a title company in New Jersey? Our title and escrow professionals at Armour Title Company can perform a title search, issue title insurance and even provide escrow and closing services. Give us a call or contact online if you have any questions!