It’s easy to get lost in all the words wrapped up with new home ownership: amortization, closing costs, collateral, contingency, depreciation, down payment … the list goes on and on. We’re here to help you understand two commonly confused terms in the realm of homeownership – mortgage insurance and homeowners insurance. While they both involve insurance for your home, they serve distinct purposes and offer different coverage. In this article, we will delve into the differences between the two, explaining what each entails, the coverage offered with each, who needs them, and the typical costs associated with both.
Is Mortgage Insurance Different Than Homeowners Insurance?
Yes, mortgage insurance and homeowners insurance are different. While each covers a different aspect of insurance related to your house, mortgage insurance protects the lender, while homeowners insurance protects you – the homeowner.
|Mortgage Insurance||Homeowners Insurance|
|Who does this type of policy cover?||The lender||The homeowner|
|What is the purpose of this type of policy?||To mitigate the lender’s risk, allowing them to approve loans for buyers with lower down payments.||To cover the physical structure of your home, personal belongings, and liability for injuries that may occur on your property.|
|When is this type of policy required?||Typically required for homebuyers who make a down payment of less than 20% of the home’s purchase price.||Not typically required by law, but if you have a mortgage, your lender will likely require that you carry a policy to help protect the investment of the mortgage company. Even if you do not have a mortgage, homeowners insurance is recommended as it provides valuable coverage.|
What Does Mortgage Insurance Cover?
If 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 covers the lender’s financial interests without direct benefit to you – the homeowner. The amount of coverage and the terms for this type of policy can vary depending on the specific mortgage insurance policy and the insurance company.
What Does Homeowners Insurance Cover?
Homeowners insurance offers a broader range of coverage that helps to provide financial protection for you – the homeowner – in a variety of incidents that could occur, leaving you financially responsible. This includes coverage for:
- Dwelling: Protects the structure of the home itself, including walls, roof, floors, and built-in appliances against covered perils.
- Personal belongings: Reimburses you for the value of personal belongings like furniture, electronics, clothing, and other possessions if they are damaged or stolen.
- Liability coverage: This can help pay for legal expenses and potential settlements if someone is injured on your property and files a lawsuit.
- Additional living expenses: Can cover the cost of meals or temporary housing if your home becomes uninhabitable due to a covered incident.
Do I Have to Have Mortgage Insurance?
If you’re looking to purchase a new home, you may need to have mortgage insurance depending on the amount you are able to spend on the down payment. In general, if you have a smaller down payment, the need for mortgage insurance is more likely.
- Conventional Loans: A down payment of less than 20% typically requires private mortgage insurance (PMI) for conventional loans. Once your equity in the property reaches 20% or more, you can request for your mortgage insurance policy to be canceled.
- Government-Backed Loans: Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) loans have their own insurance programs. FHA loans require Mortgage Insurance Premiums (MIP), while VA loans have a funding fee.
What are the Cons of Mortgage Insurance?
The great thing about mortgage insurance is that it opens up the door for homeownership even if you cannot afford a large down payment. That isn’t to say, however, that it doesn’t come with some drawbacks for you to be aware of:
- Additional cost: Mortgage insurance adds to your overall cost of homeownership since you have to pay monthly premiums, which increase your mortgage payments.
- No direct benefit to the homeowner: Mortgage insurance does not offer any protection or benefits to you as the homeowner. If something happens to your home and the policy pays out, it will go to the lender instead of you.
- Difficult to cancel: You must remember to request policy cancellation once you reach 20% equity. This process may require an appraisal (at an additional cost) to confirm the property’s value and can be time-consuming.
Is Property Insurance and Homeowners Insurance the Same?
Yes and no. Property insurance is a general term for insurance that protects properties like homes, commercial properties, rental properties, and vacant homes from specific risks and liabilities. Homeowners insurance is a type of property insurance.
Still have questions? Don’t worry, we’re here to help. Contact us or request a free, custom quote today. At Independent Insurance Associates, we pride ourselves on finding insurance coverage just right for you!