Most companies require that you purchase your insurance policy within 24 months of closing. However, some companies may allow you to purchase a policy up to 5 years after closing your loan. Your lender will require you to pay the first installment of your home insurance at closing. Most lenders will charge approximately 10 to 20% of your annual home insurance premium as closing costs and will deposit the funds into your escrow account for the next billing cycle.
Without the escrow, you'll often have to pay the entire first year's home insurance premium at closing. Some lenders may also charge a nominal fee for not meeting the escrow requirement. Most of the monthly escrow payment goes to the mortgage, but some of it goes to home insurance and taxes. When you don't have much capital in your home, you may not be as interested in protecting it as your lender does, so you'll want to make sure that your home insurance policy is in place securely and up to date.
As with other forms of mortgage protection, there are advantages and disadvantages associated with obtaining an MPI. Unlike conventional life insurance, if you die, your mortgage company receives the benefits of your MPI policy, not your loved ones or family members. FHA mortgage insurance includes an initial cost, which is paid as part of the closing costs, and a monthly cost, included in your monthly payment. In some of the final documents, you might see the term “hazard insurance,” which is just another name for homeowners insurance.
Homeowners insurance is typically divided into monthly payments, but it's required up front when closing a new home to ensure that you don't fall behind on your payments, leaving the lender exposed. Private mortgage insurance (PMI) rates vary depending on the amount of the down payment and credit rating, but are generally cheaper than FHA rates for borrowers with good credit. With VA-backed loans, which are loans intended to help military service members, veterans and their families, there is no monthly mortgage insurance premium. Each month, you pay a specific amount (usually a few hundred dollars) above your normal mortgage payment.
Let's talk more about the MPI and how it works, find out how much it costs to get mortgage protection insurance, and consider if buying a policy is right for you or not. Most MPI companies also set strict limits on when you can buy a policy; for example, many will require you to get your insurance policy within 2 years of closing your mortgage loan. Individual lenders can also offer mortgage programs that allow you to avoid PMI, such as programs for low-income buyers or people who practice specific professions, such as teaching or medicine. If your down payment is less than 20%, most lenders will require you to pay private mortgage insurance (PMI).
Keep in mind that certain items may belong to a specific category with a maximum limit set by your insurance company. FHA loan borrowers must pay mortgage insurance premiums (MIP) and pay for insurance to protect mortgage lenders in the event that a borrower defaults on their FHA loan.