New homebuyers are sometimes confused about the different types of insurance discussed during the home buying process. These include:

• Private mortgage insurance (PMI)
• PMI payment options
• Title search and title insurance
• Homeowner's insurance
• Flood insurance

Private Mortgage Insurance back to top

Private mortgage insurance helps protect the mortgage company against financial loss if a homeowner stops making mortgage payments. This protection is provided by private companies and allows mortgage companies to accept lower down payments than would normally be allowed.

Private mortgage insurance also enables mortgage companies to grant loans that would otherwise be considered too risky, by allowing these loans to be purchased by third-party investors like the Federal National Mortgage Association (Fannie Mae^®) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Private mortgage insurance is available on a wide variety of home loans.

PMI Payment Options back to top

Private mortgage insurance premiums are included in your monthly home loan payment. Premiums are based on the amount and terms of the home loan, and will vary according to the amount and type of loan, and the amount of coverage required.

Monthly plans allow a borrower to pay only one or two month's worth of premium at closing, with additional monthly payments made along with the regular mortgage payment. Typically, home buyers choose to add the amount of the mortgage insurance premium to the loan amount. By doing this, homebuyers can reduce their closing costs and increase their interest tax deduction. (Consult a tax professional.)

Title Search and Title Insurance back to top

A title search is performed to examine the public records, laws, and court decisions to ensure that no one, except the seller, has a valid claim to the property and to disclose past and current facts regarding ownership of the property. The title insurance policy is a contract in which the insurer agrees to pay the insured a specific amount for any loss caused by defects of title to real estate. You'll pay the premium once – as part of your closing costs. Rates for title insurance vary by state, typically in the 0.4% - 0.7% range – or $600 to $1,050 for a $150,000 loan.

You may have to pay for title insurance, but consider the following ways of lowering your cost:

• Ask the seller to pay for your coverage:  this is a requirement in some states and something that can be negotiated in others.
• Find out whether you can have the current title policy already on the house reissued to you by the title insurer or the lawyer doing the new title search:  this can save you hundreds of dollars, since it will mean a less-involved search, providing the policy isn't too old.
• Check your title policy for exceptions that may leave you with less protection than you want:  if any exceptions are a concern, ask the title insurer if they can be removed from the policy.
• Shop around:  don't be afraid to look for the best deal.

Homeowner's Insurance back to top

As a borrower, you'll be required to purchase homeowner's insurance. When you insure your home, you should buy sufficient coverage for the total cost you'd pay to rebuild your home if it were destroyed. If you don't have sufficient coverage, your insurance company may only pay a portion of the cost for repairing damage to your home. Check with your First Horizon relationship manager for coverage requirements. Consider the following ways for insuring the structure of your home:

• Replacement cost:  insurance that pays the cost of replacing the damaged property without a deduction for depreciation, but limited to a maximum dollar amount.
• Guaranteed replacement cost:  insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. This coverage is not available in all states and some companies limit the coverage to 120% of the cost of rebuilding your home. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials.
• Actual cash value:  insurance that pays you an amount equal to the replacement value of damaged property, minus an allowance for depreciation. Unless a homeowner's policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

Flood Insurance back to top

Flood insurance is very important because a standard homeowner's insurance policy does not cover damage from flooding. To determine if you are required to carry flood insurance, a flood certificate will be ordered to determine whether the property is in a flood zone. Flood insurance is available only where the local government has adopted adequate flood plain management regulations under the National Flood Insurance Program (NFIP). For more information, call NFIP at (888) FLOOD29.