If you have recently just bought a house, or are thinking about buying one, you have probably encountered the terms “mortgage insurance” and “homeowners insurance,” but what exactly is the difference between them?
Well, the key difference is that while mortgage insurance protects the lender, such as the bank, homeowner insurance protects the borrower, or the owner of the house.
>>MORE: How much is a dental cleaning without insurance?
What is mortgage insurance?
Also commonly referred to as private mortgage insurance, or PMI, mortgage insurance protects the lender of a mortgage in any event that the borrower (i.e. the homeowner) does not make their mortgage payments, including cases of serious illness or death.
Typically, lenders will require borrowers to purchase mortgage insurance if their down payment is less than 20% of the sale price of the house. While the cost of mortgage insurance varies, it usually sits between 0.58% to 1.86% of the amount loaned, with around $70 of additional monthly expenses for every $100,000 borrowed. Mortgage insurance is generally paid as a monthly premium, but it can also be paid through a lump sum.
There are some exceptions, however. For instance, the Federal Housing Administration only requires a down payment of 3.5% before offering loans, but it also requires the borrower to pay mortgage insurance for the sum of the loan. On the other hand, they allow you to end your mortgage insurance premiums after 11 years if your down payment is larger than 10%.
There are certain criteria that will increase your chances of receiving a loan from a mortgage lender. These include:
- A solid credit history
- Regular income
- No debt or a low debt-to-income ratio
- A down payment of or more than 20% of the sale price
However, the beauty of mortgage insurance is that those without a steady income or small savings can still purchase a house, because the lenders will no longer have to worry about whether you will or will not pay your monthly mortgage. Purchasing mortgage insurance also allows people to put much smaller down payments on their homes, which is particularly beneficial for first-time homebuyers who may have lots of student debt or little savings in their accounts.
There are even some scenarios where lenders may not require mortgage insurance, even if you only make a small down payment. This is why it is always best to talk with your lender about whether mortgage insurance is required and any exceptions you may qualify for.
As well, to learn more about your mortgage insurance options and costs, you can visit the Consumer Financial Protection Bureau online to find more information.
>>MORE: How Much Does A Doctor’s Visit Cost Without Insurance? (Full Guide)
What is homeowners insurance?
While the two are often conflated, homeowners insurance is not the same thing as mortgage insurance. While mortgage insurance is not required for purchasing a home, it is strongly recommended that every homeowner purchase homeowners insurance.
In essence, homeowners insurance, also referred to as hazard insurance, protects you from certain financial liability if your house suffers structure or property damage from instances such as fires or storms. Filling a claim with your homeowners insurance helps prevent you from paying out-of-pocket for these types of damages, which will instead be covered by your insurance company (not counting your deductible, of course).
It is likely that your mortgage lender will require that you have homeowners insurance to also protect their institution from paying damages on what is technically their property. Even if you have paid off your mortgage or never had one to begin with, homeowners insurance is a very wise investment, which would otherwise leave you having to pay for any repairs or rebuilds to your home.
However, not all damages are created equal. While your homeowners insurance will cover you for a variety of situations, not every damage to your home or property will be covered. Here is a list of what your homeowners insurance policy is likely to cover:
- Fire and smoke damage
- Hail, windstorms, and lightning strikes
- Explosions
- Vandalism
- Damage created by an aircraft or vehicle
- Theft
- Objects falling on your house/property
- Damage made by ice, snow, or sleet
- Water damage, excluding flood damage
Keep in mind that most homeowners insurance policies do not cover damages associated with many natural disasters, including floods and earthquakes. If you are at high risk for these disasters in your area, you will probably have to supplement your policy or purchase a separate one.
In addition, a general homeowners insurance policy should cover you for the following:
- Your house’s main structure as well as any detached structures (at replacement cost)
- Personal belongings, such as electronics, furniture, and clothing (either at replacement cost or cash value)
- Personal liability from any accidents and/or injuries occurring on your property that result in litigation (for example, in the case that a visitor slips on ice on your driveway, your coverage would help cover their medical bills and/or lawyer fees if a claim is made against you)
- Any living expenses associated with you being displaced, such as temporary lodging in a hotel or Airbnb, and sometimes even food costs
Now, there are a couple of different ways that you can pay for your homeowners insurance. Many lenders establish and manage an escrow account for their borrowers, which functions like a savings account. For people with a mortgage payment, some of that money may be put into your escrow account, which can be used towards paying your homeowners insurance and other expenses like property taxes. However, if you do not have a mortgage, you will likely have to purchase an individual policy.
Unless you have a mortgage, homeowners insurance is not required. Yet, the average annual cost of a homeowners insurance policy is only $1312 for $250,000 in coverage for your home. In this case, the monthly premiums are well worth it in the case of damages to your house or property, which could be extremely costly if paying out-of-pocket.
>>MORE: Home Warranty vs. Home Insurance: What’s the Difference?
Key differences between mortgage and homeowners insurance
In summary, mortgage insurance protects the lender in the case that you cannot or do not pay your mortgage, and is usually required if your down payment is less than 20% of the sale price of the house. On the other hand, homeowners insurance protects you from paying for any damages to your house or property.
The following chart highlights some key differences between mortgage and homeowners insurance:
| Homeowners insurance | Mortgage insurance | |
| Covers… | Both the homeowner and the lender | Only the lender |
| Required by… | Some mortgage lenders and strongly recommended for all homeowners | Mortgage lenders if your down payment is less than 20% of the sale price |
| Paid through… | Monthly premiums either to lender or insurance company | Monthly premiums or in a lump sum to lender or insurance company |
| Average annual cost… | $1312 annually for $250,000 in coverage | 0.58% – 1.86% of the loan amount |
It is strongly recommended that you discuss your options with your mortgage lender and/or insurance company before purchasing a house or an insurance policy. This is to ensure that all of your needs are met and that you receive the best coverage. You can also find plenty of information online, such as on the Consumer Financial Protection Bureau’s and the Federal Housing Administration’s websites.
>>MORE: How Much Is An Eye Exam Without Insurance? (Full Cost Guide)