September 18, 2021

SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs

SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs

, SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs

Home Insurance Vs. Mortgage Insurance

Share This :
, SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs
, SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs

Buying a home for the first time is confusing, especially when you’re trying to understand the extensive home-buying lingo. When it comes to determining the type of insurance you need, don’t confuse home insurance with mortgage insurance.

What is Home Insurance?

Homeowners insurance financially protects you if your house and/or belongings are damaged or destroyed. This includes damage from fires, tornados, explosions and riots. Standard home insurance policies also cover external items such as fences, sheds, shrubs and trees.

Other important coverage types within home insurance are:

  • Liability: Covers injuries and property damage you accidentally do to others. Liability insurance also pays your legal fees if you’re sued over a situation that’s covered by the policy.
  • Medical payments to others: Pays out for small injuries to guests on your property, whether or not you’re legally liable for them. For example, medical payments coverage can make a fast payout to someone who slips on your icy steps.
  • Loss of use: If you’re unable to live at home due to damage covered by the policy, loss of use pays your extra expenses such as hotel and laundry bills. It’s also called additional living expenses coverage.

Homeowners insurance also provides indirect coverage to a mortgage lender. If you have a mortgage, your lender will require homeowners insurance to protect their financial stake in the property—for example, so that you don’t walk away from a home destroyed by fire.

What is Mortgage Insurance?

Mortgage insurance is sometimes required by a lender and protects them if you default on your loan. Mortgage insurance does not protect your house or your own financial interest in the home. For example, it doesn’t pay you for damaged furniture like home insurance would. It only protects the lender if you’re unable to make mortgage payments.

Mortgage insurance is typically required when you put less than 20% down on the property. This is because a lower down payment yields a higher risk to the lender.

Home Insurance Vs. Mortgage Insurance: Key Differentiators

Homeowners insurance pays you if there’s theft or damage of your property (house or possessions). By contrast, mortgage insurance pays your lender if you default on the loan. If you can’t make mortgage payments, the mortgage insurer will make sure the lender receives the balance.

Home Insurance vs. Mortgage Insurance: Lender Requirements

If you have a mortgage, the type of insurance you’re required to have depends on how you pay for the home.

Homeowners insurance purchase requirements. If you financed the property, lenders generally will require you to have homeowners insurance before they fund the loan. Since lenders have a financial interest in your property, they want to ensure it’s protected if something like a fire were to destroy it.

Even after you repay your mortgage, it’s wise to maintain your homeowners insurance policy. While it’s not a requirement at this point, the policy will protect you from financial loss if something happens to your home or belongings.

Mortgage insurance purchase requirements. While you may be required to purchase homeowners insurance, you can usually avoid mortgage insurance if you put down 20% or more of the property’s appraised value.

A lender will require different types of mortgage insurance depending on the type of loan you apply for. For example, conventional loans could require that you purchase private mortgage insurance (PMI) if you put less than 20% down.

With conventional loans, you can generally cancel your PMI once you reach 20% equity. Check with the lender to verify how long you must keep PMI and how to request cancellation.

Federal Housing Administration (FHA) loans require only a 3.5% down payment, but you’ll need to pay for mortgage insurance for the entirety of the loan if you put less than 10% down. If you put more than 10% down, you can cancel your mortgage insurance premium (MIP) after 11 years.

Home Insurance Vs. Mortgage Insurance Payments

Home insurance payments: Payments for homeowners insurance and mortgage are sometimes bundled into a single payment. Some lenders require you to have an escrow account. Your lender typically collects the funds as part of the mortgage payment, puts the funds in the escrow account, and then pays your home insurance company on your behalf. By using an escrow account, the lender can ensure home insurance is paid for on time.

Mortgage insurance payments: Your loan type will determine how you make your mortgage insurance payments. If you have to buy PMI, the lender may let you choose an upfront payment or monthly payments added to your mortgage.

FHA loans require you to pay an upfront MIP and an annual fee included in your monthly payment.

More from Forbes Advisor

Share This :