Homeowners Insurance vs. Mortgage Insurance

Before you move on from the homebuying process to officially owning a home, it is vital to understand the various types of insurance that homeowners will come across. Specifically, there are two categories of insurance that you should be aware of as you start the homebuying process: Homeowners insurance and mortgage insurance.

No, they are not the same thing, and both have different intentions. In order to better understand the key differences between these two types of insurance, we will go over the details you need to know. 

What is mortgage insurance?

The purpose of mortgage insurance is to protect the interests of lenders in the event that a borrower defaults on their home loan. For conventional loans, it often applies in scenarios in which a homebuyer provides a down payment that is less than 20%. You will have to cover the cost of mortgage insurance, though it is usually factored into your monthly mortgage payments.

However, the exact price of mortgage insurance will vary depending on your lender and the type of home loan you choose for your home purchase.

How does it work?

There are two types of mortgage insurance you are likely to come across as you shop around for the right home loan:

1. Private mortgage insurance (PMI): This type of insurance is often applied to conventional loans with a down payment that is less than 20%. It is typically paid as a monthly fee and the exact cost will be based on various factors, including the loan-to-value (LTV) ratio and your credit score. You may also have the option of paying for PMI upfront at closing, depending on your lender. However, whether you decide to opt for monthly payments or pay upfront, PMI can be removed once you have reached a specific LTV ratio that is determined by your lender or when you have 20% equity in your home.

2. Mortgage insurance premiums (MIP): If you decide to use an FHA loan for buying a home, then it will come with MIP. With this type of insurance, you will pay an up-front fee at closing (a percentage of the total mortgage amount) and then continue to make monthly MIP payments that are included in your mortgage payment. Your monthly fee is calculated based on your loan-to-value ratio and loan term.

Unlike PMI, MIP is a requirement on all FHA loans, regardless of your down payment. However, if you provide a down payment of 10% or more, MIP can be removed after 11 years of payments. Otherwise, you will be required to pay for it for the life of the loan. You will also have the option to refinance to get rid of MIP.

What does mortgage insurance cover?

Mortgage insurance does not cover your home, instead it is meant to protect your lender in case of a mortgage default.

Are you required to have mortgage insurance?

Some lenders may not require private mortgage insurance on your home, especially if you are able to provide a larger down payment. However, in the case of MIP, it is always required in order to move forward with purchasing a home using an FHA loan.

What is homeowners insurance?

Unlike mortgage insurance, homeowners insurance is there to protect you and your home from damage or property losses. However, there are a number of different policy types, plus add-ons and exclusions. Not to mention a variety of insurance providers to choose from.

Basic homeowners insurance will typically cover damage that is caused by fires, lightning, windstorms, and hail. Most standard policies will not cover damages incurred by natural disasters, or “acts of God.” You may want to take some time to conduct your own research into the patterns of local weather phenomena in order to determine what types of insurance add-ons you will need. This includes tornadoes, earthquakes, flooding, hurricanes, and more.

How do you pay for homeowners insurance?

Homeowners insurance is typically paid through your mortgage’s escrow account and your lender will pay your provider directly; however, it may also be paid out of pocket if your lender does not require an escrow account. If not escrowed and depending on the insurance provider you choose, you may have the option to pay the premium monthly, quarterly, or annually.

What does homeowners insurance cover?

Your homeowners insurance is intended to cover the costs of any damage to the home or your personal belongings. The causes of damage that are covered by most standard policies include:

• Fires or lightning (wind and hail are typically seperate additionals that may be state specific–check with your insurance carrier to see if it is included)
• Explosions
• Theft
• Vandalism
• Falling objects

Injuries to individuals or pets can also be covered. In the event that a home is too damaged to live in until repaired, homeowners insurance can also cover living expenses for temporary housing if need be. However, it is important to note that valuables such as works of art or jewelry will typically require separate insurance policies.

Is homeowners insurance required to buy a house?

Homeowners insurance will be required by your lender in order to complete a home purchase. That said, the purpose of homeowners insurance is to protect you from the unexpected. Damage to your home can become quite costly, and insurance will prevent the need for paying for your losses out of pocket.

Homeowners insurance versus mortgage insurance

Both homeowners insurance and mortgage insurance are vital as you endeavor to become a homeowner. It is important to take lender requirements into account as you shop around for the right one. Different lenders may have various mortgage insurance premium rates, so it is important to take those costs into consideration.

Even though you may not want to consider the worst case scenario, especially during the excitement of buying a new home, it is important that you protect yourself and your assets. Homeowners insurance can bring peace of mind and relief when you may need it most.