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  • Writer's pictureTaleen Krug

The Difference Between Mortgage Insurance vs Home Insurance

mortgage insurance

When purchasing your first home, understanding terms like "homeowners’ insurance" and "mortgage insurance" can be challenging if you are not an insurance expert or insurance agent.

It is important to know certain terms as well as the key differences between homeowners’ insurance/homeowners’ policy, mortgage insurance, or mortgage protection insurance, conventional mortgage, private property coverage, making monthly insurance payments, or monthly premiums, loan balance, closing cost as you navigate this important milestone in your life.

Mortgage insurance is not necessary for every homeowner, but homeowners’ insurance is typically required to adequately protect their new home.

When house hunting going through the home buying process and exploring the process of getting pre-qualified for mortgage loans, it is important to understand the diverse types of insurance, several types of mortgage insurance coverage, average costs, payment options, extra expenses, coverage options, property damage and appropriate times for purchase.

What Is Mortgage Insurance?

Mortgage insurance, also known as private mortgage insurance or PMI is like a safety net for lenders in case you cannot pay back your loan. But here is the catch: it does not cover your home or protect you as a homebuyer.

home insurance

PMI, however, is the ultimate protection for lenders when life throws you a curveball and you cannot make those payments.

When Is Mortgage Insurance Required?

It is common for mortgage insurance to be necessary when obtaining a mortgage loan with a down payment of less than 20 percent of the purchase amount. The specific requirement for mortgage insurance can vary depending on the lender and loan product. Depending on your circumstances, some lenders can waive the requirement of PMI even if you have a smaller down payment. You may want to inquire with your lender about the possibility of requiring PMI, and if any exceptions exist for which you might be eligible.

Is Mortgage Insurance Included in Your Mortgage?

Mortgage insurance is not typically included in mortgage loans. Mortgage insurance is a separate policy from your mortgage that you buy from a mortgage company and can be paid for in two ways: upfront as a lump sum or over time with monthly payments. It is common for the monthly cost of PMI premium to be included in your monthly mortgage insurance payment. By making one monthly payment, you can cover both your mortgage loan and mortgage insurance.

To determine if a lender requires mortgage insurance, how it is paid, and the associated costs, refer to the loan estimate provided by the lender for specific information, and feel free to inquire further.

Additionally, you can conduct your research by visiting a reputable online resource like the Consumer Financial Protection Bureau. To better understand the closing disclosures on your loan estimate, it is recommended that you seek information regarding PMI requirements and the payment structure, including whether premiums are paid monthly, upfront, or both.

If you require mortgage insurance, there is the possibility of canceling PMI once you have made sufficient payments on your loan and have achieved over 20 percent equity in your home. It is advised to consult with your lender to determine the specific conditions and process for eliminating PMI when it is no longer mandatory, or you have paid off the mortgage balance.

What Is Homeowners Insurance?

Homeowners insurance, or home insurance, is a type of coverage that is mandatory for all borrowers according to mortgage lenders when going through the home buying process. Unlike the necessity to purchase PMI, the obligation to obtain homeowners insurance is not dependent on the down payment amount for your home. The cost of homeowners insurance varies depending on where you reside but know that the value is linked to your home and property.

home insurance

When Is Homeowners Insurance Required?

Homeowners insurance is required for individuals who obtain a mortgage loan to purchase a home. It is advisable to maintain a homeowners insurance policy even after paying off the mortgage. After paying off your mortgage, it is no longer required for your lender to have home insurance, but it is your responsibility to safeguard your investment.

Is Homeowners Insurance Included in Your Mortgage?

Homeowners may mistakenly believe that their home insurance is included in their mortgage due to the combination of their monthly mortgage payment and homeowners’ insurance premium. However, it is important to note that homeowner’s insurance is not included in the mortgage. The insurance policy is independent of your mortgage loan agreement. When your loan and insurance costs are combined into one monthly payment, your homeowner's insurance premium goes to your homeowner's insurance company, while your mortgage payment goes to your mortgage lender.

A mortgage lender may establish an escrow account to pay homeowners insurance and property taxes, which helps to ensure timely payment of these crucial expenses. Usually, the bank collects the money from your monthly mortgage payment and puts it in escrow. Then, they make payments to your homeowner's insurance company every six months or every year.

Do I Need Homeowner Insurance After My Mortgage Is Paid Off?

Homeowners' property and liability insurance is necessary even after your mortgage is paid off to protect your home. Homeowners' property coverage offers financial support in the event of damaging incidents such as fire, lightning, windstorms, or water damage, helping to cover the costs of rebuilding or replacing your property. Homeowners’ liability insurance protects if a guest sustains injuries from a fall at your residence.

Homeowners insurance and PMI are distinct, but mortgage lenders require both to safeguard their interest in the home.

Mortgage insurance protects the lender, while homeowners’ insurance protects the home, its contents, and the homeowner. When the mortgage is fully paid off, the homeowner has complete equity in the home, making homeowners insurance even more important for their financial security.

Examples of Coverage

Here are four reasons you need homeowners’ insurance after paying off your mortgage:

Homeowners insurance provides coverage for the structure of your home and can assist in paying for repairs or rebuilding in the event of a covered natural disaster or incident, such as a break-in, lightning storm, house fire, tornado, or hurricane. Additionally, most policies also include coverage for detached structures on the property, such as storage sheds, gazebos, or guest houses. It is important to note that without homeowners’ insurance, you would be financially responsible for all costs associated with repairing, replacing, or rebuilding your home if it is damaged or destroyed.

When getting homeowners insurance, it is important to remember that in the event of damage, coverage should not only include the physical structure of your home. Your home also contains valuable possessions such as furniture, clothing, sports equipment, and tools that may be expensive to replace.

Not only does your homeowner's insurance protect your house, but it also has your back when it comes to stolen items like your precious mobile phone or that brand-new holiday gift that goes missing in a car break-in. Even your beloved trees and shrubs are protected by homeowners’ insurance!

Homeowners insurance can provide coverage for temporary lodging if your home becomes uninhabitable. It is advisable to include additional living expenses (ALE) coverage in your home insurance policy, as this can help cover the cost of alternative accommodation such as an Airbnb or hotel. ALE may also cover meal expenses during the time your home is being reconstructed.

Homeowners insurance provides liability coverage to protect against potential claims if someone is injured on your property. This coverage is often overlooked but essential in case of accidents such as a neighbor slipping on ice on your walkway. Liability coverage: your ultimate shield against unexpected medical bills and attorney fees when someone tries to make a liability claim against you.

Both mortgage insurance and homeowners’ insurance providers are essential for home ownership. If you would like to learn more about homeowners’ insurance, forms of homeowners insurance coverage, and forms of mortgage insurance, please contact us and we can help.

Bottom-line and Key Takeaway

The main distinction between mortgage insurance and home insurance lies in the financial protection they provide. Homeowners insurance primarily safeguards the borrower's investment, while mortgage insurance safeguards the lender's investment in your home.

If you're looking to relocate to Long Island in general, be sure to hire professional Realtors like Taleene and Ritchie Krug Jr. who can find you exactly what you are looking for in terms of the best home, house, condominium, or townhome. Lifelong residents of Long Island are part of a team with more than 40 years of combined real estate experience. They have a deep understanding of how real estate has evolved through the years which results in a team with unique dynamics and expert negotiating skills being put to work on your behalf. With twenty offices spanning Brooklyn Queens & Long Island, nobody is better equipped to manage your real estate needs.

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