Homeowners insurance can be a complicated topic for new home buyers and those who are not familiar with insurance products. Mortgage insurance vs. homeowners insurance – what is the difference?
Homeowners insurance and mortgage insurance are different products – each with a unique purpose. The main difference is who it protects.
Everyone should have a homeowners insurance policy, but not everyone needs mortgage insurance. Once you understand the differences between the products, you will be able to see why.
To help sort out the confusion, Benzinga outlines the nuances of mortgage insurance and homeowners insurance so you can make informed decisions about protecting your home and family.
Key Points
- Homeowners insurance protects the homeowner
- Mortgage insurance protects the lender
- Everyone should have a homeowners insurance policy, but not everyone needs a mortgage insurance policy
- Homeowners can pay their premiums for home insurance annually or in smaller payments to the insurer
- Mortgage insurance payments are usually made monthly to the lender or insurer
- Many homeowners have homeowners insurance and mortgage insurance, at least for some time
- Homeowners insurance can be escrowed, while mortgage insurance is always escrowed
What is the Difference Between Homeowners Insurance and Mortgage Insurance?
Unless you are wealthy or buying an inexpensive home, you need to take out a mortgage when buying a home.
Homeowners insurance has multiple parts to it. It covers the main structure and other structures on the property. It also provides protection against liability claims.
By contrast, mortgage insurance provides protection for the lender in case you fail to make your mortgage payments.
Similarities
Homeowners insurance and mortgage insurance are both forms of insurance involved in a real estate transaction. Homeowners who have both policies are required to pay premiums on both.
Differences
In the event of a loss on your home, your homeowners insurance policy will pay to repair or rebuild the home subject to the deductible. The policy will also pay for liability claims and legal expenses. A claim on a mortgage insurance policy will pay the lender a sum of money if the homeowner defaults on their mortgage loan.
Mortgage Insurance Definition
Mortgage insurance is an insurance policy that is designed to protect mortgage companies from a loss associated with the nonpayment of a mortgage premium. The purpose of mortgage insurance is to decrease the risk to the lender when making a loan to a homeowner.
To further reduce their risk, mortgage lenders conduct due diligence when deciding whether to approve a mortgage. Underwriters check a homeowner’s credit and income to make sure the applicants will be able to pay their mortgage payments without hardship.
Mortgage insurance is a win-win for the lender and the homebuyer. It provides a path for homebuyers to qualify for a loan that might otherwise be difficult to obtain.
In general, homebuyers who do not have a substantial down payment will be required to get mortgage insurance. Homeowners may be able to cancel their mortgage insurance policy once they have paid down the principal balance on the home.
Homeowners Insurance Definition
Homeowners must purchase a home insurance policy if they take out a mortgage on their property. A mortgage lender will not approve a closing on a home loan unless they have proof of homeowners insurance.
A home insurance policy covers the structure of your home, other structures and your personal property. It also covers liability and medical payments if someone gets injured while in your home. If your home becomes unlivable, your policy will also cover additional expenses for you to live somewhere else.
Homeowners insurance is optional for homeowners who do not have a mortgage, yet no homeowner should go without a home insurance policy. The cost of a home insurance premium is very small in comparison with the amount of money a homeowner would have to pay out in the event of a claim.
Standard home insurance policies cover homes for common risks such as fire, wind, theft, and vandalism. However, all home insurance policies exclude certain types of losses such as flooding and earthquakes.
When is Mortgage Insurance Required?
For homeowners who can make a large down payment on a home, the topic of mortgage insurance will not be an issue. The reason for this is mortgage lenders are looking for assurance that the homeowners they approve of are financially strong enough to pay for their homes.
In nearly all cases, if a homeowner can pay 20% of their home’s purchase price upfront, they will not need to pay for mortgage insurance.
The type of mortgage also has a bearing on whether a homebuyer needs to secure mortgage insurance. Buyers who rely on FHA or USDA loans will likely be required to obtain a mortgage insurance policy.
Conventional lenders may arrange for mortgage insurance with a third party for buyers who do not have the required down payment. Homebuyers who use VA financing do not need to get private mortgage insurance, as the federal government backs their loans.
Is Mortgage Insurance Part of a Home Loan Agreement?
If mortgage insurance is required as a condition of the loan, it will be part of the home loan agreement, and all the details of the mortgage insurance will be outlined.
When is Homeowners Insurance Required?
Homeowners insurance is required only when a home buyer needs financing from a home lender to pay for their home. This holds true whether the buyer applies for a conventional loan, FHA loan, USDA loan or VA loan.
Homeowners insurance is a type of hazard insurance. It indirectly protects the mortgage lender because it protects their financial interest in their home. This is referred to as insurable interest.
Is Homeowners Insurance Part of a Home Loan Agreement?
Homeowners insurance is part of a home loan agreement in nearly every situation. It is impossible to close on a property with a mortgage without hard proof of an in-force home insurance policy before the day of closing.
It is rare for homebuyers who pay for their homes in cash to not have a homeowners insurance policy in place at the time of a property closing.
Compare Home Insurance
Overview: Mortgage Insurance vs. Homeowners Insurance
Here is a snapshot of the features of both mortgage insurance and homeowners insurance.
| Features | Homeowners Insurance | Mortgage Insurance |
| What It Covers | The dwelling, other structures, liabilities, medical payments and additional living expenses | Mortgage payments the homeowner fails to make |
| What It Does Not Cover | Certain perils such as flooding and earthquakes | The cost to repair or replace the home in the event of a partial or total loss |
| When It Is Required | Only for homeowners who have a mortgage loan, regardless of the type of loan | When homeowners have less than a 20% down payment or have an FHA or USDA loan |
| How Do I Pay For It? | Annually, quarterly, monthly or as part of a mortgage payment with an escrow | As part of the mortgage payment, at closing or both |
| Average Cost Annually | $1,249 on average for homes in all price ranges | $420 on average for homes in all price ranges |
Knowing the definitions, similarities and differences will allow you to speak thoroughly with your mortgage lender so you can make the best choices about your insurance needs.
Want to learn more about homeowners insurance, mortgage insurance, and other financial topics? Visit the Benzinga website for all the latest news and information.
Frequently Asked Questions
Do I still need to have homeowners insurance if my mortgage is paid off?
There are no laws that require you to have homeowners insurance if you pay your mortgage off, but it is not recommended. A natural disaster like fire or wind could destroy your home, and you would have to pay the cost of repairing or building it out of your pocket.
Will I have to pay mortgage insurance for the life of the loan?
Not necessarily. In most cases, once you have made enough payments where the principal balance is less than 80% of your original loan, you can request your lender to cancel the mortgage insurance policy. Sometimes, mortgage lenders will do this automatically.
Why does my mortgage company require me to have homeowners insurance?
Mortgage lenders invest a lot of money in your home until you have paid for it completely. By requiring homeowners to have home insurance, lenders are indirectly protecting your home as their asset until you pay off the mortgage.
About Maurice Draine
Maurice Draine is a former insurance agent, broker, underwriter tech, and agent sales support rep with over 15 years of professional writing experience. Maurice helps insurance, financial, and various online and ad agencies, create the words that drive customers to their websites and keeps them there.