Mortgage Insurance

As you begin the purchasing process, you might realize that you need or want several types of policies to adequately protect your property. This section discusses basic types of insurance policies available to cover and/or pay off mortgage loans. For a more in-depth explanation of how the insurance process works, review Chapter 20: Insurance.  

Required Insurance
When you take out a mortgage, your lender will require you to maintain homeowner’s or hazard insurance for the term and (at least) the amount of the loan. This type of policy protects your property against loss due to fire and other hazards. Homeowner’s is for residential spaces, while hazard is for commercial and industrial properties. 

If your mortgage is $150,000, you must have at least $150,000 in insurance coverage. It is advisable, however, to obtain enough coverage to replace your property and its contents.

If your lender requires (or allows) an escrow account, your homeowner’s insurance will be paid from this account by the lender throughout the loan term. Many times the insurance premium for the first year must be paid in full prior to the closing.

Although the insurance payment may be included in your monthly mortgage payments, you are responsible for securing insurance and making sure the coverage is adequate. You can change your insurance company as many times as you like, so long as the policy covers the mortgage.

Some homeowner’s or hazard policies might not protect your artwork and equipment, home-based studio or business. Read policies carefully and ask about options for additional coverage or if a separate policy is required.

Accidental Death and Dismemberment
This policy may pay all or a portion of your mortgage if your death, or loss of limb or sight is the result of an accident.

Disability Insurance
This type of policy will cover scheduled mortgage payments in the event you are unable to make payments due to illness or injury. Fully understand the terms of these policies before purchasing them; many provide coverage for only 1-3 years.

Flood Insurance
This type of policy protects your property against floods, but is only required in flood plains. While Chicago is not in a flood plain, you might want to discuss obtaining flood insurance if you are purchasing in a community that has a history of flooding. This insurance covers rising water associated with flooding, not water issues related to sewage problems, burst pipes from freezing, etc.

Mortgage Life Insurance
This type of policy will pay off the entire amount or a portion of the debt remaining on the property mortgage in the event of your death. You might be able to obtain a better deal with a standard life insurance policy instead of a mortgage life policy.

Private Mortgage Insurance (PMI)
Also known as PMI, lenders require this insurance if you put less than a 20% down payment on the property. This insurance protects the lender in the event that you default on the loan and the property goes into foreclosure. This policy typically is required for residential purchases.

Title Insurance
Title insurance protects against claims made by people who believe they have an ownership right to the property. While these claims are usually discovered during the title search, there is no guarantee that all claims will be uncovered. The lender will purchase this insurance to protect its interest in the property. Consider this type of policy if you have concerns about the title (for example, because you purchased the property through foreclosure or at auction).

Warranty Insurance
This type of policy, typically for residential properties, protects you against defects in the property that arise post-closing. If the property is new, the builder will usually carry a one-year warranty that fully insures you against defects. You can purchase policies that extend this warranty for up to 10 years.

Although this insurance often applies to new constructions only, ask your lender or insurer if it is available in your area for pre-owned homes and/or those that have been rehabbed.