If you’re a first-time homebuyer, you may have heard the terms “mortgage insurance” and “home insurance,” and wondered if they’re the same. While both offer coverage, the two insurance types are not interchangeable. Mortgage insurance pays your lender if you default on your mortgage, while homeowners insurance insures your home, personal belongings and provides liability coverage against covered claims. Understanding the differences between the two can help make sure you have the right insurance coverage.

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Mortgage insurance vs. home insurance

The key difference between mortgage insurance vs. home insurance is who it protects. Homeowners insurance mainly protects the borrower, while mortgage insurance protects the lender and its investment in your home.

Mortgage insurance

Mortgage insurance, also known as private mortgage insurance (PMI), protects mortgage lenders if the borrower doesn’t repay their mortgage. Borrowers of conventional loans are typically required to pay PMI when they make a down payment of less than 20% when purchasing a home. The PMI premiums will be canceled after a certain portion of the mortgage is repaid. Borrowers of FHA and USDA loans who put down less than 20% also have to pay mortgage insurance premiums (MIP), which can’t be canceled in most cases.

Homeowners insurance

Homeowners insurance, also known as hazard insurance, helps repair your home’s structure and property from financially devastating losses like fires, storms and other perils listed in your policy. If a covered claim damages your house, your property insurer will help cover the repairs, minus your deductible. If your home has a mortgage, you will likely be required to carry homeowners insurance to help protect your mortgage company’s investment.

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 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 coverage 0.58% to 1.86% of the original loan amount

Mortgage insurance

When you take out a loan to buy or refinance a home, a bank or lender takes a risk that you will honor the terms of your loan and make monthly mortgage payments to your lender.

Loan criteria mortgage lenders typically follow for low-risk borrowers includes home buyers with a:

  • Good credit history
  • Steady income
  • Low debt-to-income ratio
  • A 20% or higher down payment on the sale price of the property

Many borrowers check all the boxes, but do not have the funds to put 20% down to purchase their property. A lender could see this as a concern. A borrower who cannot contribute a high enough down payment toward the purchase of their property may not be able to afford the higher monthly mortgage payments for the long haul in the eyes of lenders. That is where PMI comes in.

What is PMI?

Private Mortgage Insurance, or PMI, protects a bank or lender if you fail to pay your mortgage or walk away from the home and it goes into foreclosure. PMI provides the lending institution with a guarantee that its risk will be covered for lending you money.

PMI is usually required when you have a conventional home loan and make a down payment of less than 20% of the home’s purchase price. When refinancing, if your home equity is less than 20% of the value of your home you might be asked to carry PMI, too.

How much does PMI cost?

The average cost of PMI is typically between 0.58% to 1.86% of the original loan amount, and generally up to an additional $70 in monthly costs per every $100,000 borrowed. PMI is most commonly paid as part of a monthly mortgage premium but may be paid as an upfront lump sum during closing. Specific PMI terms are defined within your loan estimate and closing disclosure.

PMI is arranged by the lender and provided by private insurance companies. A lender may or may not give you payment options, but you may request some. The most common ways to pay for PMI are:

  • Monthly premium added to your mortgage payment
  • One-time upfront premium paid at closing
  • Combination of one upfront payment and monthly premiums

How can I avoid paying PMI?

There are several ways to avoid paying PMI:

  • Save more: If you delay your home purchase and can afford a larger down payment, it could prevent you from having to pay PMI.
  • Ask the lender to pay: Some lenders will cover the cost of your mortgage loan, referred to as lender-paid mortgage insurance (LPMI). However, there is a tradeoff because you could have a higher interest rate on your mortgage if you go this route.
  • Get a piggyback mortgage: Instead of getting one mortgage, you could have two. This is most often done in what’s called an 80/10/10 split, with an 80% first mortgage, 10% percent second mortgage and a 10% down payment.
  • Find a lender with its own mortgage insurance program: Some lenders offer low down payment options without PMI. This could be for first-time homebuyers, low-income buyers or people with certain occupations, like doctors or teachers.
  • Use a Veterans Affairs (VA) loan: If you qualify for a loan through the Department of Veterans Affairs, you may be able to get a mortgage without a down payment and avoid paying PMI.
  • Use a USDA home loan: If you are considered a low- or moderate-income homebuyer and located in a qualifying rural area, you may be able to apply for a USDA home loan. These loans often come with low or fixed interest rates, and don’t have a formal loan limit.

How long do I have to pay for PMI?

If you use an FHA loan to purchase your home, you may be required to pay for the entire loan term. If you use a conventional private lender loan, typically once your home reaches 20% in equity based on the appraised value or purchase price (whichever is lower), you can request PMI be removed. There are four ways to remove PMI from your mortgage:

  • Request cancellation: Once you fall below the 80% loan balance mark, you may request in writing to have your PMI canceled. You must be current on your payments, have a good payment history and may be required to provide proof the value of the home has not declined and there are no other mortgages or liens.
  • Automatic termination: Once the principal balance reaches 78% of the original home value, the mortgage insurance servicer must automatically terminate PMI.
  • Final termination: Once you have reached the halfway point of your mortgage’s amortization schedule, the lender must remove PMI. For example, the midpoint for a 30-year loan would be after 15 years of payments, regardless if you have reached 78% of the original value.
  • Refinance: If you have owned your home long enough to meet a lender’s eligibility requirements, you may be able to refinance your existing mortgage into a new loan to remove PMI. Refinancing might work if your new loan’s balance is at least 80% below the market value of your home.

Remember that private mortgage insurance protects the lender — not you — if you fall behind on your mortgage payments. If you don’t make your payments on time, your credit score will take a hit and you could default on terms of the loan, which could result in the loss of your house.

What is homeowners insurance?

Homeowners insurance protects you from financially devastating losses if your home’s structure, detached structures on your property and your personal belongings are damaged or destroyed from hazards like fires or storms. Without homeowners insurance, you would have to pay to rebuild your home or replace all your belongings yourself, which could be financially devastating.

Even in rare cases where your lender does not require you to have home insurance or if your home’s mortgage is paid off, it is a prudent financial decision to have protection through insurance. The home insurance premium is small compared to the cost of repairing or replacing a home and belongings out of pocket in case of a loss.

Consult with a licensed insurance agent to help compare home insurance quotes and buy the right amount of homeowners coverage to provide you and your family with financial peace of mind.

What does homeowners insurance cover?

Homeowners insurance policies offer different levels of protection based on the policyholder’s preferences. For example, a policy may offer coverage to replace your personal property at either actual cash value or replacement cost. Your policy may also have open perils coverage or named perils coverage.

Generally, most standard homeowners insurance policies include the following coverage types:

  • Your home’s dwelling and detached structures (at replacement cost)
  • Your personal belongings, including furniture, electronics and clothing (at actual cash value or replacement cost)
  • Personal liability from lawsuits due to accidents and/or injuries on your property
  • Additional living expenses, to cover temporary lodging and food costs, when you have been displaced from your home due to a covered loss

The most common homeowners insurance perils are:

  • 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)

Most standard home policies do not cover earthquakes, floods and sinkholes. For coverage against these perils, you’ll need to purchase a standalone policy or, if your company offers it, add a separate endorsement for an additional fee to be insured against a specific peril. Flood insurance, for example, may be purchased through the federally backed National Flood Insurance Program (NFIP) or dozens of private insurers. Your insurance agent can help you purchase these additional coverage types.

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