Both homeowners insurance & mortgage
coverage can increase price of property ownership. You'll likely encounter them
both when you apply for mortgage. But that is where similarities end. basic
differences are: Private Mortgage Insurance [or PMI] covers your lender in
event that you cannot make your mortgage payment.
Mortgage Insurance or Homeowners Insurance?
Although homeowners' insurance &
mortgage coverage sound same, in practice they are quite different. Below is
short description of both.
What is Homeowners Insurance [HMO]?
homeowners insurance protects your house
& contents against damage due to unforeseen circumstances. Most homeowners'
insurance policies also protect you against lawsuits in event that someone is
injured on your property. This insurance also covers your property & home
against damage or loss related expenses. best insurance for those who want to
protect their home & possessions.
Your homeowners policy could include:
- structure of home
- Your personal belongings
- You, your family & even pets can be held liable for
injuries you cause other people.
- If someone gets hurt at your house, you will be responsible for
medical expenses.
- Additional living expenses during time your house is not
habitable
However, there are limitations. There are
limits, though.
What is Mortgage Insurance?
PMI, also known as private mortgage
insurance or just Mortgage Insurance [PMI], has very distinct difference. It is
policy that protects bank or other lender in case of non payment.
homeowner pays an annual percentage of
total cost of their mortgage with PMI. If they cannot make their mortgage
payments, then insurance company pays lender. cost of home ownership can be
increased by adding PMI to monthly payments. 2
lender is protected by mortgage insurance
& not home owner.
Differences
These are main differences between two
different types of insurance:
What is difference between homeowners insurance &
mortgage insurance?
type of insurance that you require depends
on kind of mortgage, your down payment & your progress towards paying off
your loan.
What is need for home insurance?
majority of homeowners carry some form of
insurance. This is partly because mortgage lenders require that homeowners have
homeowners insurance in order to obtain loan. lenders want to protect
themselves in event that your house is destroyed or irreparably damaged.
Mortgagee Clause achieves this goal by forcing insurer to pay your lender.
Many people continue to pay their
homeowners insurance even when they have paid off their mortgage. high cost of
replacing homes as well as costs of lawsuits can lead to homeowners insurance
being good investment. monthly premiums are much lower than cost of rebuilding
your house or replacing all your belongings if you were to be sued for covered
catastrophe or to replace your entire home.
What is Mortgage Insurance & Do I need it?
Your lender will determine answer.
Mortgage insurance is required by most
borrowers who make deposit of less than 20 percent of purchase price of home.
If you are refinancing or taking out traditional loan & your equity falls
below 20%, you will need to purchase mortgage insurance. With Federal Housing
Administration loans, Mortgage Insurance Premium [MIP], is always required.
It's because lenders consider mortgages
with less than 20% as high risk & want to protect themselves in case they
can't make your payments.
However, you can cancel PMI after paying
off significant portion of your mortgage. Check with your lender to find out
their specific rules. You can usually cancel PMI when principal of your house
falls below 80%. contract price of home or its appraised value when purchased
[whichever is less] is used to determine this. When requesting cancellation,
you must be current with your bills & have made on time payment history.
FHA loans come with their own set of rules.
If you had ratio of loan to value [LTV], at time you obtained your FHA
mortgage, you may have been required to keep your MIP in place for up to 11
years or even for entire term of your mortgage.
Can homeowners' insurance be used interchangeably with
mortgage insurance?
No. Your home & contents are covered by
your homeowners insurance. Private mortgage insurance or PMI [also known as
mortgage insurance], protects mortgage lender if you are unable to make your
payments.
Is mortgage insurance always required?
Mortgage insurance is usually required for
borrowers who make downpayment of less than 20 percent of price of their home.
Federal Housing Administration loans [FHA], as well as U.S. Department of
Agriculture loans.
What can I do to avoid PMIs?
A down payment of 20% on price of your home
is one way to avoid PMI. If you're required to buy PMI, don't avoid it. If you
are obligated to buy PMI, then your lender will do it & charge you. This
may cost more than if you bought it yourself.
Bottom Line
As you go through process of obtaining
mortgage, you will come across homeowners insurance & other types of
insurance. However, they are two very distinct insurances. In event of lawsuit,
homeowners insurance will protect your house, its contents & even you. PMI
[also known as mortgage insurance] protects lender in case you are unable to
make your payments.
It makes financial sense for homeowners to
have insurance against unexpected expenses. If your downpayment is below 20% or
you have an FHA loan, then PMI will be added to your mortgage. You can trade on
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Mortgage insurance vs. Homeowners' Insurance: Questions
& Answers
What's difference between mortgage & homeowners
insurance?
Both of these policies offer different
coverage, even though they both concern property ownership.
- homeowner's policy: It protects You, home
owner. This insurance covers your house, contents & liability in
case someone is injured on your land.
- PMI: It protects mortgage
lender. lender is reimbursed if your defaults on mortgage & they
are forced to sell your house.
Who must have which type of insurance policy?
- Insurance for
homeowners: majority of lenders will require that you have
insurance on your home to protect investment.
- PMI [Property
Mortgage Insurance]: This insurance is usually
required by lenders with down
payments of less than 20 percent. Some FHA loans may also require it
to reduce risk of government. You can stop paying PMI once you have 20%
equity [80% loan to value].
What is average cost of different types of insurance?
- Homeowners Insurance: Prices vary depending on your location, your home's value
& how much coverage you select. It usually ranges between $1000 & $3,000 per annum.
- PMI [mortgage
insurance] premiums: These are typically
between 0.5% to 1% per year of loan
amount. cost is usually added on top of your mortgage payments each
month.
Which insurance type is most important?
two types of insurance have different
functions.
- Insurance for
homeowners protects your financial security in
event of an unforeseen incident.
- mortgage insurance service is designed primarily to benefit lending institution.
it may also help you indirectly by helping you get loan that you can
qualify for.
