Not everybody knows nor understands the difference between mortgage insurance vs. homeowners insurance.
The two insurance policies no doubt have 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 and homeowners insurance, this post will demystify the differences.
But before then, what is Insurance?
Table of contents
- What is Insurance?
- What is Mortgage Insurance
- What is Insurance?
- What is Mortgage Insurance
- What exactly is PMI?
- How Much Does It Cost To Have PMI?
- Is It Possible To Avoid Paying PMI?
- Homeowners Insurance
- What is Covered By Homeowner’s Insurance?
- Difference between Mortgage Insurance vs. Homeowners
- FAQs
- Conclusion
- References
- Recommendation
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 have 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 and homeowners insurance, this post will demystify 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 if a borrower defaults.
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.
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:
- A favorable credit history
- Consistent earnings
- Debt-to-income ratio is low.
- A 20% or higher down payment on the property’s purchase price
Many borrowers meet all 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 be unable 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 monthly costs for every $100,000 borrowed.
It is usually included in the monthly mortgage payment but can also be paid in one flat sum at closing. PMI terms are spelled out in your loan estimate and closing disclosure.
Private insurance companies supply PMI, which the lender negotiates. A lender may or may not provide payment options, but you can 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
Is It Possible To Avoid Paying PMI?
Save more: Delaying your home purchase until you can afford a higher down payment may prevent you from paying PMI.
Request that your lender pays for your mortgage insurance: Some lenders will cover the cost of your mortgage insurance, known as lender-paid mortgage insurance (LPMI). However, there is a cost because you may have a higher mortgage interest rate if you take this path.
Obtain a piggyback mortgage: You might obtain two rather than a single mortgage. 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 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 due to a covered claim, your property insurer will assist in covering 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 customer’s needs.
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 case of a lawsuit arising from an accident or injury on your property.
Additional living expenditures to pay temporary lodging and food costs if you are forced from your home due to 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 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 | The borrower pays monthly payments and/or a portion of the 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 coverage | 0.58% 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. Suppose your home is damaged or destroyed by a covered peril, such as a windstorm or fire. In that case, your lender will want to ensure that their investment is protected by a home insurance policy covering the cost of repairing or rebuilding your home.
Your regular home 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 monthly mortgage payment normally funds your escrow account. Your lender handles your escrow account, paying your homeowners insurance and property taxes annually.
You’ll want to double-check that your homeowner’s insurance policy has the relevant mortgagee clause, so 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 arduous, especially when you don’t know the difference between insurance mortgage and homeowners insurance.
This article explains everything you need to know about mortgage insurance vs. homeowners insurance.
Cheers to the new home!!
References
- bankrate.com – Mortgage insurance vs. home insurance: what’s the difference?
- Travelers.com – What’s the Difference Between Homeowners Insurance and Mortgage Insurance?
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