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MORTGAGE KNOWLEDGE CENTER

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  1. Home
  2. Mortgage Knowledge Center
  3. What is Flood Insurance and Do I Need It?

MORTGAGE

What is Flood Insurance and Do I Need It?

What you'll learn: Learn about flood insurance coverage and whether you should obtain it

EXPECTED READ TIME: 4 MINUTES

June 21, 2023

What is Flood Insurance and Do I Need It?

Flood insurance is pretty easy to understand; it’s a type of insurance coverage that is bought to protect property owners against damage caused by flooding. Insurance companies define flooding as excess water on land that is normally dry, that affects two or more acres and/or two or more properties. Most people don’t know that a standard homeowners, renters, and business insurance policy does not cover flood damage; it is crucial for property owners and renters to understand the risks they face and if they should consider purchasing a separate flood insurance policy. We’ll discuss why you might need or are required to buy flood insurance, the benefits of having it, and whether or not you should get this coverage even if you don’t think you need it.

Do I need flood insurance?

There are several factors to consider when you are answering this question. These factors include:

  • where you live
  • the elevation of your property
  • the likelihood of a flood occurring in your area

If you reside is in a low-lying area, or you live in a region prone to hurricanes, typhoons, heavy rain, or other natural disasters that could cause flooding, you are more likely to need flood insurance.

Designated Flood Zone (high risk flood area)- You can do a search for your property and see if it is classified as a high risk flood area at the following website https://msc.fema.gov/portal/home

Additionally, when you live in a designated flood zone, nearly all traditional mortgage lenders will require you to purchase flood insurance in order to receive their funding.

Am I Required to Have Flood Insurance?

There are a few groups that are required to have flood insurance.

  • Government-Backed Mortgages- Homes and businesses in a high-risk flood area or designated flood zone with a government-backed mortgage must have flood insurance.
  • Private Mortgage Lenders- typically flood insurance is federally required for those living inside of a high-risk area, but some lenders may require flood insurance outside of a flood zone.
  • Recipients of Disaster Assistance- If your home is in a high-risk flood area and you received any federal disaster assistance, including a grant from FEMA (Federal Emergency Management Agency) or a low-interest disaster loan from the SBA (U.S. Small Business Administration) you are also required to obtain and maintain flood insurance to be eligible for any future federal disaster aid.

Flood Insurance Types

The NFIP uses a risk rating system (The Risk Rating 2.0) to determine equitable and easy-to-understand rates that reflect a property’s flood risk. The tool allows FEMA to distribute premiums equitably based on the home’s value and its flood risk. The tool addresses rating disparities and has new flood risk variables, including storm surges, river overflows, coastal erosion, distance to water, and rainfalls. It also incorporates a home’s elevation and the costs to rebuild. Flood insurance is available for homeowners, business owners, and renters.

Homeowners

Homes, condos, and townhomes have flood insurance policies for the structure and belongings. The foundation, electrical, plumbing, appliances, finishings, electronics, personal belongings, and more are covered. Typically, there are limits of $250,000 for the building and $100,000 for its contents, and these are generally purchased separately. 

Business Owners

These flood policies will protect the business’s structure and equipment, this includes the foundation, furnishings, electrical, plumbing, inventory, furniture, and more. There are limits of $500,000 each for the building and contents, and like homeowners, they are usually purchased separately.

Renters

Renters can also protect their belongings with flood insurance. This includes (but is not limited to) furniture, clothing, TVs, computers, rugs, and artwork. The limit for renters for this content insurance is generally $100,000 and usually starts at the cost of about $99 per year  

What’s Covered By Flood Insurance?

If the cause of damage is flooding, then many things are covered, but for example, if there is sewer backup not caused by flooding, then flood insurance may not cover it, but a homeowner’s or renter’s policy might. Items that are covered by flood insurance depend on if there is a building or contents policy. Below are examples of items typically covered by a building or contents policy.

Building Coverage

  • Electrical and Plumbing
  • Water heaters and furnaces
  • Refrigerators, stoves, and other built-in appliances.
  • Installed carpeting
  • Built-in cabinets bookcases
  • Foundation, staircases
  • Windows and blinds
  • Detached garages
  • Fuel tanks, water tanks, and pumps, solar equipment.

Content Coverage

  • Clothing, furniture, electronics, and other equipment
  • Curtains
  • Movable appliances
  • Portable air conditioners
  • Movable carpets
  • Up to $2,500 in valuable items (art, furs, etc.)

What’s Not Covered By Flood Insurance?

Like all insurance, there are exclusions to flood insurance; precious metals, currency, and valuable papers are generally not covered, and most vehicles, including cars, are not covered. Generally, the area below what is considered the first floor (crawl space and basements) has limited coverage.

With basements, only the foundation, insulation, drywall, staircases, central air conditioners, electrical outlets, and switches are covered with a structural flood insurance policy. Personal property coverage only includes washer dryers, portable air conditioners, and food freezers in basements, with most other personal property excluded. This means that electronic equipment, furniture, kitchen items, shelving, window treatments, and many others are not covered if stored in a basement. Finishing a basement for that man cave or a home theater could be problematic if there was a flood.

Should I Shop Around for Flood Insurance?

Fortunately for us, you can find flood insurance providers through the national flood insurance program (NFIP).  The NFIP partners with over 50 insurance companies and even more agents to offer the same rates for insurance. You can find a partner provider that will offer the same rates and coverage here.

You Don’t Have to Be In a Designated Flood Zone to Buy Flood Insurance

Just because you are not in a designated flood area does not mean you are not vulnerable to flooding. Even if buying flood insurance is not required for your home, it may still be a good idea to purchase flood protection for a property you own or rent. 

Disaster Payments and Payment of Flood Insurance Claims

Flood insurance will pay for claims regardless of whether there is a Presidential Disaster Declaration or not. You can find a list of all declared disasters here: https://www.fema.gov/disaster/declarations

Disaster assistance from the federal government will come in two forms: First is a low-interest loan that must be paid back. The second is a FEMA disaster grant which averages about $5000 per household.

These meager amounts given by the government are nothing compared to the average flood insurance claim with the NFIP, which in 2021 averaged $44,401. A single inch of flooding in a home is estimated to cause $25,000 in damage.

Summary and Final Thoughts

All property owners, and especially for those living in high-risk flood areas, should consider purchasing flood insurance. The benefits of having it are clear. If a flood damages your property, your insurance policy will help pay for the costs of repairing or rebuilding your home. Without flood insurance, you’ll have to pay for many of these repairs out of your own pocket, which can result in a significant financial burden.

Whether you are required to have it or not, it is worth considering purchasing a separate flood insurance policy to protect your property. While for some it may seem like an unnecessary expense, having flood insurance can provide you with peace of mind and help protect you against severe financial losses in the event of an unexpected disaster. 

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

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CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of October 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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IMPORTANT NOTICE

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The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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