When it comes to property insurance, it can be tricky to know the differences between some of the types available, such as “homeowners insurance” and “mortgage insurance.”
As you journey through the home-buying process and learn about your insurance needs, you will need to know the differences between the two. Once you know the distinctions, you might find you need one but not the other, or perhaps you even need both.
Either way, you don’t want to pay for insurance you don’t need, nor do you want to run into major financial troubles by skipping both insurance policies.
To gain a solid understanding of mortgage insurance and homeowners insurance and determine which policy you need, read on!
What Is Mortgage Insurance?
Mortgage insurance (MI) is required by some lenders to protect their interests if the homebuyer defaults on their loan. In other words, MI lowers the risk to the lender and allows you to qualify for a loan that you otherwise might not be able to.
In most cases, MI is not a part of the loan, but a separate insurance policy. MI is usually paid for upfront, monthly, or a combination of both.
Who Is MI For?
MI is often discussed in the context of down payments. Generally, MI is required if the down payment on a home is less than 20 percent of the purchase price.
MI is also required for Federal Housing Authority (FHA) and U.S. Department of Agriculture (USDA) loans. These loans often require little to no down payment, making them riskier for the lender.
Just like most aspects of the lending process, every situation is different, so be sure to consult with your Loan Officer before setting your sights on a mortgage.
Misconceptions About MI
Many people have the impression that mortgage insurance is an unnecessary monthly cost.
However, MI can be a smart financial decision, even for those who don’t necessarily need it. For example, imagine a loan that you wouldn’t qualify for without MI, but would qualify for with MI. In which scenario would you get into your home earlier (and consequently start building home equity in earlier)? The loan with MI.
What Is Homeowners Insurance?
Homeowners insurance (HI) protects your property’s structure and your belongings in the case of a destructive event. It also covers your liability—or legal responsibility—for injuries to others caused by you or members of your household.
HI excludes flood and earthquake insurance. These are separate policies that you should consider if your property is in a high-risk location.
Unlike MI, HI is required by all mortgage lenders for all homebuyers. And while MI is set at a fixed monthly cost, HI is tied to the value of the home and property.
Additional Information About HI
Although many homeowners have insurance and mortgage bundled into a single payment, the two payments originate from two separate policies.
To help ensure that you can pay off both your mortgage and HI, your lender might recommend an escrow account, which is an account managed by a third party to the lender and borrower to ensure funds are available.
Is HI Still Required After the House Is Paid Off?
Although your mortgage lender cannot require homeowners insurance after you have paid off your mortgage, it is still highly recommended that you continue to have homeowners insurance and liability coverage. Why?
- Because HI covers damages to your home.
- Because liability coverage protects you if someone is injured on your property.
Here are the four main benefits of HI after you have paid off your mortgage:
- The structure of your home is protected. In the event of a disaster or break-in, your HI can help you repair or rebuild your home.
- Your possessions are protected. The structure of your house isn’t the only thing protected under an HI policy. It also includes objects inside the house and—under certain policies—in the yards, such as trees and shrubs.
- HI pays for your housing if your property becomes unlivable. Certain HI policies include coverage for additional living expenses, which helps pay for lodging if your house is uninhabitable due to a covered event.
- You are protected from liability claims. In the case of an accident, having liability coverage as part of your HI helps pay for medical bills and even attorney costs if someone makes a liability claim against you.
Consult with Experts in the Home-Buying Process
When you decide to buy a home, mortgage insurance and homeowners insurance are only two parts of a larger equation.
That’s why you need a team of experts to walk you through the home-buying process and help you make the best personal and financial decisions.