When it comes to buying your first home, you don't have to be an insurance expert, but it might be confusing when you first hear the terms "homeowner's insurance" and "mortgage insurance". It can be helpful to know the difference between homeowners insurance and mortgage insurance as you learn more about your insurance needs during this significant new phase of your life. Although not every homeowner needs mortgage insurance, homeowners insurance is almost always required to ensure that their new home is adequately covered. Let's find out the differences between homeowners insurance and mortgage insurance.
What is mortgage insurance?
Mortgage insurance, commonly referred to as private mortgage insurance or PMI, is a type of insurance that some lenders may require to protect their interests if you default on your loan. Mortgage insurance does not protect you as a homebuyer or cover the home. Instead, PMI protects the lender if you can't make payments.
When is mortgage insurance necessary?
If you take out a mortgage loan and your down payment is less than 20% of the purchase price, you may need to purchase mortgage insurance. The need for mortgage insurance varies by lender and loan package. Some lenders, depending on your circumstances, may allow you to avoid PMI even if you make a lower down payment. Ask your lender if PMI is required, and if so, whether there are any exceptions to the rule for which you may qualify.
Is mortgage insurance included in your mortgage?
Your mortgage loan does not include mortgage insurance. It is a separate insurance coverage from your mortgage. Mortgage insurance is often paid for in two ways: in one large sum up front or over time with monthly payments. However, it's not uncommon for the cost of your PMI premium to be factored into your monthly mortgage payment. This way, you can make a single monthly payment to cover both your mortgage loan and your mortgage insurance.
Review the loan estimate you receive from a lender for details and ask questions if you want to know if a lender requires mortgage insurance, how you will pay for it and how much it will cost. You can also do your own research by visiting a website such as the Consumer Financial Protection Bureau website. To better understand what PMI might be required and whether you would pay premiums monthly, upfront, or both, look for information outlining closing disclosures on your credit estimate.
The good news is that if you need mortgage insurance, you may be able to get rid of it once you have repaid your loan enough to have more than 20% equity in your property. If you are no longer required to have PMI, check with your lender to find out when and how you can get out of PMI.
What is homeowners insurance?
Homeowners insurance, commonly referred to as homeowners insurance, is a type of coverage that all mortgage lenders require for all borrowers. Unlike the need to purchase PMI, the requirement to purchase homeowners insurance is independent of the amount of your down payment. It is proportional to the value of your home and property.
When is homeowners insurance required?
Those who take out a mortgage loan to buy a home are usually required to purchase homeowners insurance. After you pay off your mortgage, you almost certainly want to keep your homeowner's policy. While your mortgage lender can no longer force you to take out homeowner's insurance once you have repaid your loan, it is up to you to protect your investment.
Is homeowners insurance included in your mortgage?
Because they pay a single monthly payment that includes both their homeowners insurance premium and their monthly mortgage payment, some homeowners may believe their home insurance is included in their mortgage. Homeowners insurance, on the other hand, is not included in your mortgage. It is a separate insurance policy from your mortgage loan agreement. Your homeowners insurance premium goes to your homeowners insurance company and your mortgage payment goes to your mortgage lender, even if your loan and insurance payments are combined into a single monthly payment.
Your mortgage lender can set up an escrow account to pay for your homeowners insurance and property taxes. This will ensure that you have enough money to pay off both major expenses in a timely manner.
Typically, the bank collects this money as part of your monthly mortgage payment, deposits the money in an escrow account, and then pays your homeowner's insurance carrier on your behalf every six months or annually.
Do I need homeowners insurance after my mortgage is paid off?
If you want to protect your home after you pay off your mortgage, you'll need homeowner's and liability insurance. Homeowners insurance can help homeowners protect themselves from the potentially crippling cost of repairing or replacing your home after disasters like fire, lightning or storms. If a visitor falls and is injured in your home, homeowners liability insurance can protect you.
Unlike PMI, homeowner's insurance has nothing to do with your mortgage, except that it is required by mortgage lenders to protect their interest in the house.
After you pay off your mortgage, there are three reasons why you need homeowners insurance:
- Homeowners insurance covers the structure of your home
After a covered accident or event such as a burglary, thunderstorm, house fire, tornado or hurricane, your homeowners insurance can help pay for the cost of restoring or rebuilding your home. Most policies also cover detached buildings on the property, such as z. B. A storage shed, gazebo, or guest house.
- Homeowners insurance protects your property
Remember, it's not just the structure of your home that needs protection. Furniture, clothing, sports equipment and tools are among the items in your home that could be expensive to replace. Your homeowner's insurance may also cover items outside your home, z. B. A newly purchased Christmas gift that was stolen during a car burglary. It can also cover the plants and shrubs in your yard.
- Homeowners insurance can help cover your shelter if your home becomes temporarily uninhabitable.
It's a good idea to include additional living expense coverage in your homeowners policy. While your home is uninhabitable due to a covered event, this coverage can help pay for an Airbnb, hotel or other type of accommodation. Meals can also be covered by ALE while your home is being renovated.
Final thoughts – homeowners insurance vs. Mortgage Insurance
As you can see, both mortgage and homeowners insurance are essential components of home ownership. If serious damage or total loss occurs to your home and property, homeowners insurance distributes your financial risk. It's an expense worth paying for because it covers the cost of repairing or rebuilding your home and property by paying you directly.