Mortgage Insurance vs. Homeowners Insurance
The legalese surrounding the purchase of a new home may be perplexing: down payment, amortization, closing costs, collateral, contingency, depreciation, etc. We are here to help you distinguish between mortgage insurance and homeowner’s insurance, two terms that are occasionally used synonymously while discussing home ownership. Although they both deal with home insurance, their roles and the types of coverage they offer are distinct. In this piece, we’ll look at the differences between the two, describing what each entails, the coverage it offers, who needs it, and the typical costs associated with it.
Are homeowner and mortgage insurance different?
It is true that there are differences between mortgage insurance and homeowner’s insurance. Although each offers coverage for a different aspect of home insurance, mortgage insurance protects the lender, while homeowners insurance protects you, the homeowner.
| Type of Policy | Who does it cover? | Purpose | When is it required? |
| Mortgage Insurance | The lender | To mitigate the lender’s risk, allowing them to approve loans for buyers with lower down payments. | Typically required for homebuyers who make a down payment of less than 20% of the home’s purchase price. |
| Homeowners Insurance | The homeowner | To cover the physical structure of your home, personal belongings, and liability for injuries on property. | Not typically required by law, but if you have a mortgage, your lender will likely require it. Even if you do not have a mortgage, homeowners insurance is recommended for valuable coverage. |
WHAT DOES MORTGAGE INSURANCE COVER?
In the event that you default on your mortgage and the lender forecloses on your property, the mortgage insurance policy reimburses the lender for a portion of the outstanding loan balance.
Mortgage insurance safeguards the lender’s financial interests without providing you, the homeowner, with any direct benefits. The terms and coverage levels may vary depending on the specific mortgage insurance policy and the insurance company.
What does homeowner’s insurance cover?
Homeowners insurance offers a greater range of coverage and can protect you as the homeowner from having to pay for a variety of unforeseen circumstances. This includes defense against:
- Dwelling: Provides protection from covered hazards found in the walls, ceiling, floors, and built-in appliances of the home.
- Personal belongings: Pays for the replacement of your possessions, including furniture, electronics, clothing, and other goods, in the event that they are stolen, lost, or destroyed.
- Liability insurance: This can help with paying for any compensation and court fees in the event that someone is injured on your property and files a lawsuit.
- Additional living expenses: Should a covered event make your home uninhabitable, you may be responsible for paying for meals or transient housing.
Can I use mortgage insurance?
When purchasing a new home, the amount of money you can afford for a down payment will determine whether or not you need mortgage insurance. In general, a smaller down payment increases your requirement for mortgage insurance.
- Conventional Loans: Conventional loans with a down payment of less than 20% frequently need private mortgage insurance, or PMI. If you own 20% or more of the property, you are entitled to request that your mortgage insurance be cancelled.
- Government-Backed Loans: The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) of the United States both have insurance programs of their own. For FHA loans, mortgage insurance payments (MIP) are required; financing fees are associated with VA loans.
Are there any cons to mortgage insurance?
The allure of mortgage insurance is that it allows people who are unable to make a substantial down payment to become homeowners. That does not imply, however, that there aren’t any drawbacks to be mindful of:
- Excess expense: The whole cost of homeownership is increased by mortgage insurance since you have to pay monthly premiums, which increase your mortgage payments.
- No immediate benefit to the homeowner: Neither protection nor benefit are provided by mortgage insurance to homeowners. The lender will receive the money rather than you if your insurance pays out in the event that your house is damaged.
- Difficult to cancel: You need to remember to request the cancellation of the insurance once you have 20% equity. This process may require an appraisal to confirm the property’s value, which would incur additional costs and take time.
ARE PROPERTY INSURANCE AND HOMEOWNERS CONSIDERED THE SAME?
Yes and no at the same time. Property insurance is a general term for insurance that protects real estate, such as homes and businesses, rental properties, and abandoned residences, against specific risks and liabilities. Homeowners insurance is one type of property insurance.
Are there any questions you still have? Relax; we are here to help. Get in contact with us or request a free, customized quote right now. Selecting the right insurance plan for you is something we at Independent Insurance Associates take great pride in!
