Mortgage Insurance vs Home Insurance: Homeowners insurance safeguards your home, while mortgage insurance safeguards your lender.
You’re likely to come across homeowners insurance and mortgage insurance during the mortgage application process. Both of these insurance types can raise the cost of property ownership. But that is the extent of their similarity.
The main distinction is that homeowners insurance covers your house and its contents, whereas mortgage insurance, also known as private mortgage insurance or PMI, covers your mortgage lender in the event that you are unable to make your mortgage payments.
Mortgage Insurance vs Home Insurance
KEY LESSONS
- Mortgage insurance is very dissimilar from both homeowner’s insurance and it.
- In the event of a lawsuit, homeowners insurance will defend you and the contents of your home.
- In the event that you are unable to make your mortgage payments, mortgage insurance, also known as private mortgage insurance (PMI), protects your lender (such as a bank).
- The majority of homeowners carry homeowners insurance because it can be economically advantageous to guard against unforeseen expenses.
- If you opt for a Federal Housing Administration (FHA) mortgage or put less than 20% down, PMI will be necessary in addition to your mortgage.
Mortgage insurance versus homeowners insurance
Mortgage insurance and homeowners insurance may sound similar, but they differ greatly in practice. Here is a quick summary of each.
Homeowners insurance: What Is It?
Homeowners insurance is a type of property insurance made to guard your house and its contents against harm from unanticipated occurrences. In addition, the majority of homeowners insurance policies defend you in court if someone is injured on your property. Additionally, it protects your house and belongings from costs associated with damage or loss. The best candidate for this insurance is someone who wants to safeguard their home and possessions.
The following things could be covered by a homeowners insurance policy:
- Structure of a home
- personal effects
- Liability in court cases for harms you, your family, and your pets cause to third parties
- Expenses for medical care if someone is hurt in your house
- Additional expenses for housing while your house is uninhabitable
- But there are limitations. Normal homeowner’s insurance policies frequently don’t cover damage brought on by calamities like floods, mold, landslides, earthquakes, or sewer backups or overflows.
Mortgage Insurance: What Is It?
Private mortgage insurance, also known as mortgage insurance, is quite distinct. This insurance plan was created to safeguard the lender—in this case, a bank—in the event that you are unable to make your mortgage payments.
The homeowner typically pays a portion of their annual mortgage payment as PMI. The insurance company will then make payments to the lender on their behalf if they are unable to make mortgage payments. Your monthly expenses may increase if you have to pay PMI.
Not the homeowner, but the lender is protected by mortgage insurance.
Key variations
These two types of insurance’s main distinctions can be summed up as follows:
| Homeowners Insurance | Mortgage Insurance | |
| Covers | Homeowner directly and mortgage lender indirectly | Mortgage lender |
| Does not cover | A standard homeowners insurance policy typically excludes coverage for property damage caused by losses such as arson, flooding, sinkholes, mudslides, and earthquakes | Homeowner |
| Required for | A borrower financing their home purchase | A borrower making a lower down payment, usually less than 20% of the home’s purchase price |
| Payment form | Generally, the policyholder pays the premium directly to the insurance company or to the mortgage company, which then pays the homeowners insurance from the escrow account managed by the lender | Borrower pays monthly payments and/or a portion of closing costs of a home purchase to the mortgage insurer set by the lender |
| Average annual cost | Nationwide average of $1,251 per year | The cost depends on three factors: the loan amount, your credit score, and your loan-to-value (LTV) ratio. For property worth $250,000, the cost ranges from $1,091 to $1,747 per month. |
Data from the Urban Institute’s “Housing Finance at a Glance” and the National Association of Insurance Commissioners’ “NAIC Releases Report on Homeowners Insurance”
Do I require mortgage insurance or homeowners insurance?
Depending on the type of mortgage you have, the amount of your down payment, and how far along you are in paying off your mortgage, you will need different types of insurance.
Is Homeowners Insurance Necessary?
The majority of homeowners have some kind of insurance. This is partially due to the fact that mortgage lenders frequently demand homeowners purchase homeowners insurance. But many people have homeowner’s insurance for its own advantages and keep paying for it even after their mortgage is paid off.
Given the high cost of replacing homes and the high cost of lawsuits, purchasing homeowner’s insurance can be a wise financial decision. In the event of a covered disaster or if you are sued because a guest was injured, your monthly premiums may be considerably less than the cost of rebuilding your house or replacing all of your possessions.
Is Mortgage Insurance Necessary?
Your lender will determine the answer.
When a borrower puts less than 20% of the home’s purchase price down, they are typically required to purchase mortgage insurance. If you’re getting a conventional loan or refinancing your house and the equity is less than 20% of the house’s value, this rule applies. Mortgage insurance premiums (MIP), which are the equivalent of PMI for Federal Housing Administration (FHA) mortgage loans, are always needed.
This is so that lenders are covered in the event that you are unable to make your payments because they view mortgages with less than a 20% down payment as risky.
However, after paying a sizable portion of your mortgage off, you can cancel your PMI. Check with your lender to learn more about their policies as these regulations can vary. The earliest you can typically cancel PMI is when your principal balance reaches 80% of the original value of your home. This is determined by the item’s contract sales price or purchase price appraisal (whichever is lower). When requesting cancellation, you must have a history of making payments on time and be current on your bills.
FHA loans have unique regulations. Your loan terms may require you to maintain your MIP for 11 years or for the duration of your mortgage, depending on your loan-to-value (LTV) ratio at the time you obtained your FHA loan.
Homeowners insurance and mortgage insurance are they interchangeable?
No. Your house and its contents are protected by homeowner’s insurance. Mortgage insurance, also known as PMI or private mortgage insurance, safeguards your mortgage lender in the event that you are unable to make your mortgage payments.
Is mortgage insurance always necessary?
Mortgage insurance is typically required of borrowers who put down less than 20% of the house’s purchase price. Additionally, mortgage insurance is frequently needed for loans from the Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA).
How do I prevent PMI?
Making a down payment equal to 20% of the home’s purchase price is one way to avoid paying PMI. If you are required to purchase PMI, don’t try to avoid doing so. If so, your lender may purchase it on your behalf and charge you for it, which could be more expensive than purchasing it yourself.
the conclusion
As you go through the mortgage process, you will come across both homeowners insurance and mortgage insurance, but they are very different kinds of insurance.
In the event of a lawsuit, homeowners insurance will defend you and the contents of your home. In the event that you are unable to make your mortgage payments, mortgage insurance, also known as PMI, protects your lender (such as the bank).
Because it can be wise financially to protect yourself from unforeseen costs, the majority of homeowners have homeowners insurance. If your down payment is less than 20% or if you obtain an FHA loan, you will be required to obtain PMI in addition to your mortgage.