Homeowners Insurance vs. Mortgage Insurance

 



Both homeowners insurance & mortgage coverage can increase price of property ownership. You'll likely encounter them both when you apply for mortgage. But that is where similarities end. basic differences are: Private Mortgage Insurance [or PMI] covers your lender in event that you cannot make your mortgage payment.

Mortgage Insurance or Homeowners Insurance?

Although homeowners' insurance & mortgage coverage sound same, in practice they are quite different. Below is short description of both.

What is Homeowners Insurance [HMO]?

homeowners insurance protects your house & contents against damage due to unforeseen circumstances. Most homeowners' insurance policies also protect you against lawsuits in event that someone is injured on your property. This insurance also covers your property & home against damage or loss related expenses. best insurance for those who want to protect their home & possessions.

Your homeowners policy could include:

  • structure of home
  • Your personal belongings
  • You, your family & even pets can be held liable for injuries you cause other people.
  • If someone gets hurt at your house, you will be responsible for medical expenses.
  • Additional living expenses during time your house is not habitable

However, there are limitations. There are limits, though.

What is Mortgage Insurance?

PMI, also known as private mortgage insurance or just Mortgage Insurance [PMI], has very distinct difference. It is policy that protects bank or other lender in case of non payment.

homeowner pays an annual percentage of total cost of their mortgage with PMI. If they cannot make their mortgage payments, then insurance company pays lender. cost of home ownership can be increased by adding PMI to monthly payments. 2

lender is protected by mortgage insurance & not home owner.

Differences

These are main differences between two different types of insurance:

What is difference between homeowners insurance & mortgage insurance?

type of insurance that you require depends on kind of mortgage, your down payment & your progress towards paying off your loan.

What is need for home insurance?

majority of homeowners carry some form of insurance. This is partly because mortgage lenders require that homeowners have homeowners insurance in order to obtain loan. lenders want to protect themselves in event that your house is destroyed or irreparably damaged. Mortgagee Clause achieves this goal by forcing insurer to pay your lender.

Many people continue to pay their homeowners insurance even when they have paid off their mortgage. high cost of replacing homes as well as costs of lawsuits can lead to homeowners insurance being good investment. monthly premiums are much lower than cost of rebuilding your house or replacing all your belongings if you were to be sued for covered catastrophe or to replace your entire home.

What is Mortgage Insurance & Do I need it?

Your lender will determine answer.

Mortgage insurance is required by most borrowers who make deposit of less than 20 percent of purchase price of home. If you are refinancing or taking out traditional loan & your equity falls below 20%, you will need to purchase mortgage insurance. With Federal Housing Administration loans, Mortgage Insurance Premium [MIP], is always required.

It's because lenders consider mortgages with less than 20% as high risk & want to protect themselves in case they can't make your payments.

However, you can cancel PMI after paying off significant portion of your mortgage. Check with your lender to find out their specific rules. You can usually cancel PMI when principal of your house falls below 80%. contract price of home or its appraised value when purchased [whichever is less] is used to determine this. When requesting cancellation, you must be current with your bills & have made on time payment history.

FHA loans come with their own set of rules. If you had ratio of loan to value [LTV], at time you obtained your FHA mortgage, you may have been required to keep your MIP in place for up to 11 years or even for entire term of your mortgage.

Can homeowners' insurance be used interchangeably with mortgage insurance?

No. Your home & contents are covered by your homeowners insurance. Private mortgage insurance or PMI [also known as mortgage insurance], protects mortgage lender if you are unable to make your payments.

Is mortgage insurance always required?

Mortgage insurance is usually required for borrowers who make downpayment of less than 20 percent of price of their home. Federal Housing Administration loans [FHA], as well as U.S. Department of Agriculture loans.

What can I do to avoid PMIs?

A down payment of 20% on price of your home is one way to avoid PMI. If you're required to buy PMI, don't avoid it. If you are obligated to buy PMI, then your lender will do it & charge you. This may cost more than if you bought it yourself.

Bottom Line

As you go through process of obtaining mortgage, you will come across homeowners insurance & other types of insurance. However, they are two very distinct insurances. In event of lawsuit, homeowners insurance will protect your house, its contents & even you. PMI [also known as mortgage insurance] protects lender in case you are unable to make your payments.

It makes financial sense for homeowners to have insurance against unexpected expenses. If your downpayment is below 20% or you have an FHA loan, then PMI will be added to your mortgage. You can trade on go. You can trade anywhere, anytime.

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Mortgage insurance vs. Homeowners' Insurance: Questions & Answers

What's difference between mortgage & homeowners insurance?

Both of these policies offer different coverage, even though they both concern property ownership.

  • homeowner's policy: It protects You, home owner. This insurance covers your house, contents & liability in case someone is injured on your land.
  • PMI: It protects mortgage lender. lender is reimbursed if your defaults on mortgage & they are forced to sell your house.

Who must have which type of insurance policy?

  • Insurance for homeowners: majority of lenders will require that you have insurance on your home to protect investment.
  • PMI [Property Mortgage Insurance]: This insurance is usually required by lenders with down payments of less than 20 percent. Some FHA loans may also require it to reduce risk of government. You can stop paying PMI once you have 20% equity [80% loan to value].

What is average cost of different types of insurance?

  • Homeowners Insurance: Prices vary depending on your location, your home's value & how much coverage you select. It usually ranges between $1000 & $3,000 per annum.
  • PMI [mortgage insurance] premiums: These are typically between 0.5% to 1% per year of loan amount. cost is usually added on top of your mortgage payments each month.

Which insurance type is most important?

two types of insurance have different functions.

  • Insurance for homeowners protects your financial security in event of an unforeseen incident.
  • mortgage insurance service is designed primarily to benefit lending institution. it may also help you indirectly by helping you get loan that you can qualify for.

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