Difference Between Homeowner’s and Mortgage Insurance
Purchasing your first home can be a complicated and confusing process. One of the many factors to consider is obtaining mortgage and homeowner’s insurance.
While these policies may sound like the same thing, they are different from each other. To your lender, they essentially serve as a safeguard if you stop paying the mortgage or something happens to the property.
In the lengthy process of researching and buying a home, it’s a good idea to obtain coverage after you get pre-approved for a mortgage. Here’s what you should know about both types of policies and why you need them.
General Difference Insurances
Homeowner’s insurance provides a protective measure, reimbursing you in the event of an incident or natural disaster that causes significant damage to your home.
Once you file a claim, the carrier will pay you directly as you recover and make repairs. While this policy is geared more toward the homebuyer, lenders require you to have homeowner’s insurance if you’ll be paying off the mortgage.
By contrast, mortgage insurance provides a measure of protection for the lender, should you ever stop paying the loan.
What Is Mortgage Insurance?
Also known as private mortgage insurance or PMI, mortgage insurance protects the lender’s asset in the event you default on your loan. As one key difference, this form of coverage does not encompass the physical property itself or offer the homebuyer any protections. Instead, it’s a supportive strategy for the lender if a buyer appears to have a higher risk for halting payment on a loan.
Lenders are taking a risk when they approve you – especially if you’ll be making a lower down payment – and this type of insurance serves as a guarantee if you walk away from the financial responsibilities associated with homeownership.
As such, not every borrower will need mortgage insurance. It’s typically required if you will be making less than a 20-percent down payment on the property, although this factor will vary based on the lender and the type of loan.
In any event, the typical PMI payment amounts to 0.5 to one percent of the mortgage.
Along with these key differences, understand that:
- Mortgage insurance is not rolled into your loan. Homebuyers either pay it all upfront as they take out the loan or with monthly payments. PMI may be grouped with your mortgage payment but it’s a separate amount you must pay off.
- PMI typically doesn’t last the life of a loan. Instead, a homebuyer may be able to stop making payments once the property reaches 20 percent equity. However, it’s still a good idea to speak with your lender at this stage, rather than simply stop sending payments. Most borrowers will need to provide proof and submit a formal request to cancel their mortgage insurance.
- PMI is required for conventional home loans if you’ll be making a down payment under 20 percent. For FHA loans, a government-backed mortgage allowing you to make a down payment as low as 3.5 percent, borrowers are expected to pay an upfront premium and regular monthly payments. Additionally, PMI is not only for buying a home: Your lender may request it if you decide to refinance.
Is homeowner’s insurance required? It depends on the situation. If you’re not paying the full cost of your home upfront, your lender will require you to take out homeowner’s insurance.
Once you pay off the loan, the decision is up to you but ask yourself: If a natural disaster were to hit your area or a fire caused to damage your home, would you have the out-of-pocket funds to pay for repairs and rebuilding?
Even after the mortgage is paid off, homeowner’s insurance offers financial support to help you stay on your property and anticipate any incidents out of your control.
During the homebuying process, homeowner’s insurance benefits both you and the lender. For the lender, it protects the property you just took out a loan on, ensuring you can live there and make mortgage payments or helping you continue paying the mortgage even when a loss occurs.
For the homeowner, it safeguards the structure and its contents, offering assistance through a rough when damage or another covered incident occurs. Concerning your homeowner’s insurance:
- Homeowner’s insurance payments are separate from your loan and will go directly toward your carrier – not the lender.
- Your mortgage lender may offer to set up an escrow account to help you make homeowner’s insurance payments. Nevertheless, the payment will still go to a private homeowner’s insurance carrier.
- Homeowner’s insurance is not only for rebuilding and repairs. It encompasses liability, in the event someone is injured on your grounds, extends to possessions inside and certain items outside of the home, and offers coverage for temporary living accommodations if your property is no longer livable due to a covered peril.
Are you a first-time homebuyer looking for adequate homeowner’s insurance? To explore your options with an agent at Ion Insurance, contact us today.