Hey. Welcome to the second episode.
I got a very nice one to share with you on this episode, and it has to do with insurance
So when you’re buying a home, there are quite a few things that goes into it. One of them is insurance. There are literally a lot of insurance purchasing involved in buying a home; depending on you form of payment
Be it mortgage, cash, FHA loan or a regular conventional loan.
So a lot of people confuse mortgage insurance premium with homeowner’s insurance. Those two types happen almost the same time, and then there’s another one that happens during closing, which is title insurance.
I’m going to try to tell you the difference between all of them.
So mortgage insurance is usually involved when you’re using a FHA loan.
What’s FHA loan?
The government have a program called the First-time home buyer’s program. Essentially, you don’t have to come up with a conventional 20% down payment.
For example, if you were purchasing a home for $100,000, you would need $20,000 (20%) down payment with a conventional loan. But with the government’s program FHA, usually for first-time home buyers, you only have to come up with 3.5%.
So for $100,000 home, you would need to come up with $3,500. For a $200,000 home, you would need to come up with $7,000 down payment as opposed to $40,000 (20%) for cash down payment.
To protect the banks, with a down payment of 3.5% for an FHA loan, in place of coming up with the down payment of 20% in a convertional loan, they require you to purchase what they call the mortgage insurance.
So you’re paying the mortgage insurance premiums. Some people call it MIP. That’s a type of insurance right there.
There’s another type of insurance that you have to buy regardless of what kind of financing you’re using to pay for the home. It’s called the homeowner’s insurance. That protects you as a homeowner.
The mortgage insurance protects the lender in case you default a.k.a in case you stop paying your mortgage. With a downpayment as low as 3.5%, it becomes a high-risk loan so the mortgage insurance protects and edges against that risk.
The premium is usually rolled into your mortgage payment, okay? The homeowner’s insurance is something you pay for separately. That’s something that protects you in case something happens to the home like fire and other type of disasters.
That’s homeowner’s insurance and you have to buy one regardless of your type of financing.
It’s kind of like your liability type of car insurance. It doesn’t matter if you finance the car or not. It’s the minimum you are required to have by law. Homeowner’s insurance is similar.
But when you’re using FHA, you don’t have a choice. You now have to purchase a mortgage insurance premium with that. It’s included into your mortgage payment.
So a lot of time, people will say, “Hey, they told me that my mortgage payment was supposed to be $1200. How come it’s now $1300?”
That’s because you’re using FHA loan, and that insurance is rolled into it. They also add your taxes.
They call it P.I.T.I. (Principal, interest, taxes, insurance).
So that’s the difference between the mortgage insurance, which protects the lender, and your homeowner’s insurance, and that protects you as a homeowner. So hopefully, you find that tip enlightening and useful. Please feel free to reach out to us.
We also have brand-new online workshop for new home buyers. It’s available now at this link.
That will take you to registration page, and you can attend a full-blown 60-minutes workshop on the 7 people you need in a complete real estate transaction. You will also learn the 15 steps to actually buying a home. That’s all covered within 60 minutes.
You will find it very useful in your real estate endeavors. Please help us share it. Share this with your friends, even those that may already own homes, and you’ll find this information useful, and we’ll absolutely also appreciate it. I will see you on the next one. Peace.