Homeowners Insurance Vs Mortgage Insurance – Know the Top Differences

You are currently viewing Homeowners Insurance Vs Mortgage Insurance – Know the Top Differences

When buying a home, there are many types of loans that you should pay back. Home insurance and mortgage insurance are two major kinds of loans that protect the interests of the lender. As a smart buyer, you should know the key difference between homeowners insurance vs mortgage insurance. 

Simply put, home goods insurance protects your home from damage, theft, and natural disasters. Mortgage insurance, on the other hand, protects your mortgage lender in the event of a default on your mortgage. 

As you go through the home-buying process and research your insurance needs, you need to understand the differences between the two. Once you understand the differences, you may find that you need one but not the other, or maybe you need both. 

Either way, you don’t want to pay for insurance you don’t need or get into big financial trouble by skipping both insurance policies. It’s important to understand the difference between homeowners insurance vs mortgage insurance, whether this coverage is optional, and how you pay for each insurance. 

Here are the facts about the differences between the two and why you might need them both.

What Is Mortgage Insurance?

Mortgage insurance protects your lender if you cannot make your monthly mortgage payments and default on the loan. When you get traditional credit from a bank or other lender, they have to decide if you need it. 

If your deposit is very small (less than 20%), you usually need to get PMI. Mortgage insurance is always required when financing your home purchase with an FHA loan or a USDA loan. 

When it comes to making your mortgage insurance payments, you pay monthly payments as you do with other insurance products, or you can pay them as a lump sum as part of your closing costs.

What Is Homeowners Insurance?

This policy provides financial and liability protection for you as a homeowner. You can claim under your policy to compensate for losses when an insured peril causes damage to your personal property. 

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Without home insurance, you would have to pay out of pocket for things like a shed destroyed by a fallen tree or a window broken by a burglar. Unlike MI, all mortgage lenders require HI for all homebuyers. And while MI is tied to a fixed monthly cost, HI is tied to home and property value.

4 Top Differences Between Mortgage Insurance Vs Homeowners Insurance

Mortgage insurance protects your lender against losses if you default on the mortgage. This protects them from financial losses incurred as a result of foreclosures. Remember that mortgage insurance does not protect your home from damage. 

You need household contents insurance for this. Home insurance is specifically designed to protect you, the homeowner, from having to pay high expenses if your home is damaged or destroyed for a variety of reasons. 

The differences between these two types of insurance home insurance vs mortgage insurance are listed below:

1. Covers

Exactly what your homeowner’s insurance covers depends on the insurance company, but it generally covers the cost of repairing or rebuilding your home and the loss of your personal belongings. 

Each homeowner’s insurance policy may cover different types of perils, have different maximum claim payments, and have a different deductible that you must pay before insurance pays. 

On the other hand, personal mortgage insurance covers the loan amount and all associated costs that the lender would incur if the home were foreclosed.

If the borrower defaults on the loan, the PMI company pays the lender for any losses incurred during the foreclosure and sale of the home. 

The lender bears a risk for the borrower, and the borrower pays for the insurance that protects the lender.

2. Required By

Homeowners insurance is required for buyers financing a home through a lender. The fact is that homeowners insurance allows borrowers in difficult financial situations to quickly repair damage to the home, thereby preserving the value of the home. 

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PMI requirements vary somewhat by the lender, although this is a standard requirement when a borrower has less than a 20 percent down payment. In some cases, a lender may even require PMI with a 20 percent down payment if the borrower has a bad credit history or a high debt-to-income ratio.

3. Payment Form

You decide how to take out and pay for this insurance. You can choose the company with which you take out your home insurance. And homeowners are advised to shop carefully because a lot of money can be saved by combining home and auto insurance

While some mortgage lenders allow you to pay the homeowner’s insurance company directly as long as you provide proof that your policy is strong, other lenders require you to pay through an escrow account they maintain.

4. Average Annual Cost

PMI payments are typically 0.5% to 1% of your loan amount per year, so you’ll be paying anywhere from $30 to $70 each month for every $100,000 you borrow.

The cost of home insurance depends on several things, including where you live, what condition your home is in, how much coverage you choose, and what your deductible is. 

The average annual cost of homeowners insurance in the USA is range from $1,680 per year to $1440 per year.

How To Avoid PMI Without A 20% Down Payment?

The best option to avoid PMI without saving 20 percent is to get a government-backed loan that doesn’t require it. VA and USDA rural development loans are available with little or no down payment and without the need for PMI or other ongoing insurance payments. 

Both require upfront fees, ranging from 0.5 percent to 3.3 percent for VA loans and about 2 percent for USDA mortgages, but since these are one-time costs, they can be more in the long run. cheaper than the monthly PMI payment. 

However, there are, of course, limits to this type of credit. VA mortgages are limited to veterans, and USDA Rural Development Loans cannot be used to purchase real estate in urban areas, although they can be used in many adjoining suburban areas.

How Long Duration Should I Have To Pay For PMI?

You have the right to request that your servicer cancel PMI when you have reached the date when your mortgage principal balance is expected to fall to 80 percent of your home’s original value. 

You can find this date on a PMI disclosure form in which you received your mortgage. If you cannot find the disclosure form, please contact your administrator. 

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You can apply to cancel PMI earlier if you’ve made additional payments that reduce your mortgage principal balance to 80 percent of your home’s original value.

FAQs About Home Insurance Vs Mortgage Insurance

What is the difference between homeowners insurance and mortgage insurance?

While both mortgage insurance and home insurance can be part of the home-buying process, they differ in many ways. The main difference between these two types of insurance is who is protected.

Mortgage insurance protects the lender (who holds the mortgage) while they invest in your property. On the other hand, there is homeowners insurance, which protects the homebuyer and the mortgage holder against damage or loss of the home.

Is homeowners insurance the same as mortgage insurance?

No, While home insurance covers you for physical damage to your home, among other things, mortgage insurance is designed to protect the lender if you default on your payments. In addition, they can affect your budget in very different ways.

Plus, unlike home insurance, you don’t have to pay PMI forever. A traditional lender is usually happy to remove PMI once you’ve paid 20% of the appraised or purchase price.

Do you need mortgage insurance and homeowners insurance?

Yes, you need mortgage insurance if the down payment on a home is less than 20 percent of the purchase price. MI is also required for AFHA and USDA loans. These loans often require little or no down payment, making them riskier for the lender.

On the other hand, you need home insurance in case your home or property is damaged, your home becomes uninhabitable, or you become liable after someone is injured on your property.

When you can stop paying mortgage insurance?

Once your loan-to-value ratio reaches 80%, you can ask your lender to cancel your PMI loan. The lender must automatically cancel your PMI when you reach 78% of your mortgage loan to value or when you reach halfway through your mortgage loan, even if you haven’t yet reached 78% of your home’s value.

So if you have a 30-year mortgage, you have a maximum of 15 years to make your PMI payments.

How much does mortgage insurance cost?

The cost of the mortgage protection insurance premium depends on several factors, including the balance and duration of the mortgage, the location of the home, and the age and gender of the policyholder.

For many homeowners, MPI is easy to qualify for and often less expensive than term or life insurance.

Is home insurance included in your mortgage?

No, homeowners insurance is not included in your mortgage. You may pay for it with your mortgage payments if your lender buys it for you and includes it in your payments.

However, it is recommended that you get your own insurance to get a good deal and better coverage for your personal property, not just the lender’s interest in the structure of the home.

Final Thought

Mortgage insurance and homeowners insurance have their part to play in helping you move up the homeownership ladder. We recommend making a 20% down payment on your home, condo, or townhome mortgage to avoid the additional costs associated with PMI.

Another way to reduce the total cost of these services is to pay less for home insurance.

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