What's the Difference Between Mortgage Insurance and Home Insurance?
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While mortgage insurance and homeowners insurance are both involved in closing on a home, they are different. Mortgage insurance protects the lender against loan default, while homeowners insurance covers the homeowner for liability claims and property damage due to events like fires or break-ins.
Learn more about the key differences between mortgage insurance vs. homeowners insurance, including how much each costs and when they’re required.
What Is Mortgage Insurance?
Required by lenders when a homebuyer makes a down payment less than 20% of the home’s purchase price, mortgage insurance protects the lender in case the borrower defaults on their mortgage payments. It's an additional cost for the borrower, separate from the loan principal and interest.
For example, if you buy a home for $300,000 and put down 10% ($30,000), your loan amount will be $270,000. In this case, you'd need mortgage insurance since your down payment is less than 20%. The cost of this insurance, either as a monthly fee or an upfront premium, is an expense you must budget for in addition to your mortgage payments.
How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance can vary depending on your loan amount, credit score and the type of loan you have. PMI costs, for instance, range from about 0.2% to 2% of the initial loan amount annually. For example, if your loan balance is $300,000, the PMI might be around $6,000 per year with a PMI of 2%, or $500 per month.
On the other hand, if you opt for paying the premium upfront, the upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount along with an annual premium that can range between 0.45% to 1.05% depending on the size of the loan and the term. For instance, on a $250,000 loan with a term under 15 years, the upfront MIP would be $4,375. The annual MIP at 0.45% would then be $1,125.
Is Mortgage Insurance Required?
Mortgage insurance is typically required for borrowers who make a down payment of less than 20% on their home purchase. It is also mandatory for all FHA loans, regardless of the down payment amount. However, for loans backed by the VA, mortgage insurance is not required due to the VA's guarantee. The necessity of mortgage insurance varies based on loan type, down payment size and lender requirements.
Once you reach this equity threshold, you can request your lender to cancel the PMI and it is automatically terminated when you reach 22% equity.
What Is Homeowners Insurance?
Homeowners insurance is a form of property insurance designed to protect an individual's home against damages to the house itself, other structures on the property or to possessions in the home. It covers a range of potential damages, such as those resulting from natural disasters (like fires or storms), theft or vandalism. For instance, if a healthy tree falls on your house during a storm, homeowners insurance can help cover the cost of repairing the damage.
In addition to covering physical damage, homeowners insurance typically includes liability protection. This means if someone is injured or damages their property while at your home, and you're found responsible, your policy can help pay for their medical expenses, repairs/replacements or legal fees.
What Is the Difference Between Mortgage Insurance and Homeowners Insurance?
Mortgage insurance protects the lender in case the borrower defaults on their loan. Home insurance, on the other hand, covers damage to the property itself due to events like fires, theft or natural disasters and is a safeguard for the homeowner. While mortgage insurance benefits the lender, home insurance provides financial protection directly to the homeowner against potential property damage or loss.
Protects the lender if the borrower defaults on the loan
Covers damage to the property from events like fires, theft or natural disasters; also covers against liability claims
Typically required for down payments less than 20%, mandatory for FHA and some USDA loans
Required by most lenders as a condition for a mortgage, but also chosen by homeowners for protection
Depends on loan type, down payment size and possibly credit score
Varies based on rebuilding costs, location, coverage amount and policy details and more
Typically monthly, sometimes upfront
Monthly, quarterly, semiannually or yearly
$1,200 per year on average
Do I Need Home Insurance if I Have Mortgage Insurance?
Since you’re paying mortgage insurance, that means you still have an outstanding balance and most lenders will require that you maintain homeowners insurance coverage until you repay your loan. That also means that even if you cancel PMI within your mortgage term, the homeowners insurance requirement still stands. Homeowners insurance is optional after you repay your loan but is highly recommended to keep so that you can fully protect your home.
What Types of Mortgage Insurance Are There?
Mortgage insurance can take different forms depending on the nature of the loan.
Private Mortgage Insurance
For conventional loans, lenders often secure mortgage insurance through private firms. The cost of this private mortgage insurance (PMI)depends on your credit score and the size of your down payment, typically offering lower rates than FHA loans for those with strong credit. PMI is usually billed monthly and often doesn't require a significant upfront payment when the home is purchased.
FHA Mortgage Insurance
FHA mortgage insurance, or mortgage insurance premium (MIP) is mandatory for all FHA loans and the cost remains consistent regardless of your credit score, with a minor cost increase for down payments under 5%.
USDA Mortgage Insurance
Technically, private mortgage insurance premiums are not charged on USDA mortgage loans. Instead, borrowers will need to pay an annual guarantee fee that is typically bundled into the monthly loan payment.