Homeowners Insurance vs. Mortgage Insurance: What is the Difference?

Depending on the type of home loan you apply for and your qualifications and down payment amount, you might need to pay for mortgage insurance.

This could take the form of mortgage insurance premiums (MIP) for an FHA loan or private mortgage insurance (PMI) for a conventional loan.

You might be wondering whether this is the same thing as purchasing homeowners insurance. Do you need both? Or are you covered with PMI or MIP?

Actually, homeowner’s insurance and mortgage insurance are two very different things. Let’s break it down.

Mortgage Insurance: Protection for Your Lender

Mortgage insurance actually is not about protecting you or your home or belongings at all. It exists solely for the benefit of your lender.

When you apply for a home loan, a lender will only approve you if they believe that you will be able to pay off the mortgage in full and on time.

But sometimes, borrowers default on their mortgages. Their situations may change. If that happens, lenders turn to mortgage insurance to help protect them.

The more you put down when you buy a home, the less risk the lender takes on. That is why, for example, if you put down at least 20% when you buy a home with a conventional mortgage, you typically do not need to pay for PMI.

If you are paying for mortgage insurance after taking out a loan, you might be able to stop paying for it later once you have built up sufficient equity. But this depends on the type of mortgage and other factors.

In cases where you cannot remove the mortgage insurance requirement after increasing your equity, refinancing your home loan could be an option for getting rid of it.

Homeowners Insurance: Protection for You

Now let’s talk about homeowners insurance. Regardless of whether you need to pay for mortgage insurance, your lender will only approve you for a mortgage if you are paying for homeowners insurance.

This is the type of insurance that does protect you. Specifically, it applies to your home, and usually will also cover personal property and additional structures you may have on the premises.

Your insurance policy may kick in should there be damage or losses due to:

• Wind, hail, or lightning
• Fire
• Vandalism
• Theft

In most situations, you will have to buy separate coverage for earthquake or flood damage. Whether or not this is a requirement will depend on where you live and what the lender’s policies are.

There are some things that homeowners insurance does not cover. Generally, this would be anything that you could foresee and prevent. One example would be damage resulting from wear and tear. The expectation is that you would keep up with the maintenance of your home, preventing such damage from occurring.

Another example would be damage by pests. Once again, insurance companies expect you to get rid of pests as they show up, or prevent them from entering your home to begin with.

So, for instance, imagine that there is a leak in your roof. If that leak was caused by lightning striking a tree that fell on your roof, homeowners insurance might cover the damage.

But if the leak was caused by a failure to maintain your roof, that would be your fault, and not covered by your insurance.

Technically, once you own your home in full and no longer have the mortgage, you could stop paying for homeowners insurance. But that would be a bad financial decision. So, you should plan to pay for it for as long as you will be in your home.

Be Sure to Budget for All the Insurance You Need

Now you know the difference between homeowners insurance and mortgage insurance. The first protects your investment in your home, and the second protects the lender.

No matter what, you need to budget for homeowners insurance. To find out whether you also need to budget for mortgage insurance, ask your mortgage company during your consultation.

If you are shopping for a home in Miami or anywhere in Florida, Lending Bankers Mortgage can answer your questions about these types of insurance. To get started, please call 786-220-1100 to schedule your consultation.