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Shopping for Homeowner's Insurance and Private Mortgage Insurance

Because the value of your house is backing your mortgage, you will be required by your lender to have homeowners insurance to cover a variety of damages that could reduce the property's value. Prices can vary significantly, so shop around.
Also make sure you get the right coverage for your situation. For example, if you live in an area that is at high risk for floods or earthquakes, you should consider purchasing additional insurance coverage if it is not otherwise required by your lender.
Private Mortgage Insurance (PMI) protects the lender when a borrower fails to pay. It is usually required for loans in which the down payment is less than 20 percent of the sales price. For the typical mortgage loan, PMI costs about $40 to $70 per month or around $500 to $800 a year. "PMI is costly and you should try to avoid it," said Luke Reynolds, an FDIC Community Affairs Specialist. "If you can't afford the large down payment that would save you from PMI, ask the bank if there are other options for a smaller down payment without PMI." Under federal law, with certain exceptions, PMI automatically will be terminated if the borrower accumulates 22 percent equity in the home and is current on mortgage payments.
Some homebuyers inadvertently pay for PMI if they add the closing costs to the loan balance, thereby reducing their down payment to less than 20 percent of the home's value. By paying the closing costs instead of adding them to your loan, you can avoid paying interest on the closing costs and avoid paying PMI.