Mortgage Insurance vs Homeowners Insurance: What’s the difference?

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Not everybody knows nor understands the difference between mortgage insurance vs homeowners insurance.

The two insurance policies no doubt has something to do with your house. However, they are not protecting the same thing or person.

With the understanding that most people cannot tell the difference between mortgage insurance vs homeowners insurance, this post will be demystifying the differences.

But before then, what is Insurance?

What is Insurance?

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses. This includes both big and small, which may result from damage to the insured or her property. It could also be from liability for damage or injury caused to a third party.

What is Mortgage Insurance

Not everybody knows nor understands the difference between mortgage insurance vs homeowners insurance.

The two insurance policies no doubt has something to do with your house. However, they are not protecting the same thing or person.

With the understanding that most people cannot tell the difference between mortgage insurance vs homeowners insurance, this post will be demystifying the differences.

But before then, what is Insurance?

What is Insurance?

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses. This includes both big and small, which may result from damage to the insured or her property. It could also be from liability for damage or injury caused to a third party.

What is Mortgage Insurance

Mortgage insurance, commonly known as private mortgage insurance (PMI), safeguards lenders in the event that a borrower defaults on their loan.

When acquiring a property with a down payment of less than 20%, conventional loan borrowers are often obliged to pay PMI.

After a portion of the mortgage is paid off, the PMI premiums will be terminated. Borrowers who put down less than 20% on FHA and USDA loans must also pay mortgage insurance premiums (MIP), which cannot be canceled in most situations.

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More about Mortgage Insurance

Mortgage kicks in when you take out a loan to buy or refinance a house. A bank or lender takes a chance that you will stick to the conditions of your loan and make your monthly mortgage payments on time.

Loan requirements Mortgage lenders often follow for low-risk borrowers:

  • Credit history that is favorable
  • Consistent earnings
  • Debt-to-income ratio is low.
  • A 20% or higher down payment on the property’s purchase price

Many borrowers meet all of the requirements but lack the finances to put down a 20% deposit on a home. This could be a source of concern for a lender. A borrower who cannot make a large enough down payment on their home may not be able to afford the higher monthly mortgage payments.

What exactly is PMI?

It’s a type of insurance that protects a bank or lender if you default on your mortgage. It also protects them if you walk away from your house, resulting in foreclosure. PMI ensures that the lending institution’s risk is covered in exchange for lending you money.

When you have a conventional house loan and a down payment of less than 20% of the purchase price, PMI is normally necessary. If your home equity is less than 20% of the value of your property, you may be requested to carry PMI as well when refinancing.

How Much Does It Cost To Have PMI?

PMI fees typically range from 0.58 percent to 1.86 percent of the original loan amount, with up to an extra $70 in monthly costs for every $100,000 borrowed.

It is usually included in the monthly mortgage payment, but it can also be paid in one flat sum at closing. PMI terms are spelled out in detail in your loan estimate and closing disclosure.

Private insurance companies supply PMI, which is negotiated by the lender. A lender may or may not provide you with payment options, but you have the right to ask for them. The following are the most popular ways to pay for PMI:

  • Your mortgage payment will be increased by a monthly premium.
  • A one-time upfront payment is paid at the time of closing.
  • Combination of a single upfront payment and a monthly payment
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Is It Possible To Avoid Paying PMI?

Save more: Delaying your home purchase until you can afford a higher down payment may allow you to avoid paying PMI.

Request that your lender pays for your mortgage insurance: Some lenders will cover the cost of your mortgage insurance, which is known as lender-paid mortgage insurance (LPMI). However, there is a cost because you may end up with a higher mortgage interest rate if you take this path.

Obtain a piggyback mortgage: Rather than obtaining a single mortgage, you might obtain two. The most common arrangement is an 80/10/10 split, which includes an 80 percent first mortgage, a 10% second mortgage, and a 10% down payment.

Look for a lender that offers its own mortgage insurance: Some lenders will accept a minimum down payment in exchange for no PMI.

Homeowners Insurance

Homeowners insurance, often known as hazard insurance, covers the structure and contents of your house against financially devastating losses such as fires, hurricanes, and other perils specified in your policy.

If your home is damaged as a result of a covered claim, your property insurer will assist cover the costs of repairs, minus your deductible. If you have a mortgage on your home, you will almost certainly be required to have homeowners insurance to safeguard your lender’s investment.

What is Covered By Homeowner’s Insurance?


Homeowners’ insurance policies provide varying levels of protection depending on the needs of the customer.

A policy might, for example, cover the cost of replacing your personal property at either its actual cash value or its replacement cost. Open perils coverage or named perils coverage may be included in your policy.

The following coverages are typically included in most regular homeowners insurance policies:

The residence and detached constructions of your home (at replacement cost)

Furniture, gadgets, and apparel are among your personal belongings (at actual cash value or replacement cost)

Personal liability in the event of a lawsuit arising from an accident or injury on your property.

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Additional living expenditures to pay temporary lodging and food costs if you are forced from your home as a result of a covered loss.

According to the Triple-I, the most common perils covered by homeowners insurance include:

  • Fire and smoke
  • Windstorms and hail
  • Lightning strikes
  • Explosion
  • Vandalism and malicious mischief
  • Aircraft or vehicle
  • Theft
  • Falling objects
  • Weight of ice, snow or sleet
  • Water damage (but not flood damage)

Difference between Mortgage Insurance vs Homeowners

The table below will help you understand the major differences between Mortgage vs Homeowners insurance.


Homeowners insurance
Mortgage insurance
Covers:Homeowner directly and mortgage lender indirectlyMortgage 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 earthquakesHomeowner
Required for:A borrower financing their home purchaseA 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 lenderThe 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:$1,312 annual premium for $250K in dwelling coverage0.58% to 1.86% of the original loan amount

FAQs

To safeguard their funds in the case of a calamity, your lender would most likely need you to get home insurance coverage. If your home is damaged or destroyed by a covered peril, such as a windstorm or fire, your lender will want to make sure that their investment is protected by a home insurance policy that will cover the cost of repairing or rebuilding your home.

Your regular homes insurance will cover the cost of repairing fire damage to your home, structure, and belongings, minus your deductible, under the conditions of your policy. Additional living expenses are also covered if you require temporary housing while repairs are being performed.

Your escrow account is normally funded by your monthly mortgage payment. Your lender handles your escrow account, which subsequently pays your homeowners insurance and property taxes on an annual basis.

You’ll want to double-check that your homeowner’s insurance policy has the relevant mortgagee clause so that your property insurer understands where to send your premium bill. If you don’t include that information on your insurance policy, your home’s insurance may be canceled for nonpayment.

Conclusion

Deciding to own your own home can be a herculean task. Especially when you really don’t know the difference between mortgage insurance and homeowners insurance.

This article has explained in detail all you need to know about mortgage insurance vs homeowners insurance.

Cheers to the new home!!

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