Homeowners Insurance vs. Mortgage Insurance

When purchasing a home, it’s essential to understand the various types of insurance that may be required or recommended. Two common types are mortgage insurance and homeowners insurance. While they might sound similar, they serve very different purposes and offer distinct financial protections.

What Is Mortgage Insurance?

Mortgage insurance mainly serves to safeguard the lender rather than the homeowner. It typically becomes necessary when a borrower provides a down payment of less than 20% of the home’s purchase price. This insurance mitigates the lender’s risk in case the borrower defaults on the loan. The following are the two main types of mortgage insurance:

1. Private mortgage insurance (PMI) is typically required for conventional loans with a down payment of less than 20%. PMI can be canceled once the homeowner’s equity reaches 20%.

2. Mortgage insurance premium (MIP) is typically required for Federal Housing Administration loans regardless of the down payment amount. MIP usually lasts for the life of the loan unless refinanced into a conventional loan.

Mortgage insurance costs can be influenced by the loan amount, down payment size and the borrower’s credit score. It’s usually added to the monthly mortgage payment, increasing the overall cost of homeownership.

Homeowners Insurance

Homeowners insurance, on the other hand, is designed to financially protect the homeowner and their property. It typically includes dwelling coverage, personal property coverage, liability coverage and additional living expenses coverage.

Lenders typically include homeowners insurance requirements as part of the mortgage agreement. The price of this insurance is influenced by various factors, including the home’s location, age, construction type and the coverage limits selected by the homeowner.

Key Differences

The following are the key differences between mortgage insurance and homeowners insurance:

• Purpose—Mortgage insurance can help financially protect the lender, while homeowners insurance can help financially protect the homeowner and their property.

• Requirement—Mortgage insurance may be required for loans with low down payments, whereas lenders require homeowners insurance to protect their investment in the property.

• Coverage—Mortgage insurance can help cover the lender’s risk, while homeowners insurance can help cover property damage, personal belongings, liability and additional living expenses.

Learn More

For homeowners insurance near you, contact Super Insurance Discounts.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.