When you buy a home, one of the biggest expenses you’ll face is your mortgage. But did you know that there are two different types of insurance you need to consider? Mortgage insurance and homeowners insurance is both important, but they offer different protections. Here’s what you need to know about the difference between homeowners insurance and mortgage insurance.
Difference Between Homeowners Insurance and Mortgage Insurance
In reality, homeowners insurance and mortgage insurance are not similar at all. Here’s a quick rundown of each.
What Is Homeowners Insurance?
Homeowners insurance is a type of property insurance. That safeguards your home and belongings from potential hazards. It also protects you from lawsuits if someone gets injured on your property. Homeowners insurance covers damage- or loss-related expenses, making it ideal for anyone wanting to protect their house and possessions. A homeowners insurance policy may cover:
- The structure of ‘Home’
- Personal effects
- You, your family members, and pets can all be held liable in a lawsuit if you cause injuries to another person.
- If someone is injured in your home as a result of an accident, you may be responsible for their medical expenses.
- While your house is unoccupied, you’ll have to pay for additional living expenses.
There are a few limits to note, standard Home Insurance policies typically exclude damage done by natural disasters like floods or earthquakes, mold, and sewer or drain backups.
What Is Mortgage Insurance?
Mortgage insurance, also known as private mortgage insurance (PMI), is distinct. This is a bank’s insurance policy that protects it in the event that you are unable to pay your mortgage installments. The homeowner pays a percentage of their overall mortgage payment each year in the case of PMI. The insurance company then reimburses the lender if they are unable to make mortgage payments. Inclusion of PMI on your monthly expenses might raise the cost of house ownership. NOTE Mortgage insurance protects the lender, not the homeowner.
What is PMI?
PMI, or private mortgage insurance. Is an over-the-counter product that protects a lender. If you default on your loan and the property eventually goes into foreclosure. PMI guarantees that the bank’s risk will be reimbursed for loaning money to you. A PMI insurance premium is generally required if you have a standard mortgage and make a down payment of less than 20% of the property’s purchase price. If your home equity is less than 20% of the value of your house, you may be asked to pay PMI when refinancing.
How much does PMI cost?
On average, PMI costs range from 0.58% to 1.86% of the loan’s original value and $70 extra monthly per every $100,000 borrowed. You can either pay for PMI as part of a monthly mortgage premium or as a one-time sum during closing. Your loan estimate and closing disclosure will have more details on specific terms. You can usually PMI choose from two different ways to pay for it, semi-annually or monthly. The lender will set up the payments with a private insurance company. But you may have some say in how the bill gets paid. Here are your options.
- At the closing, you must pay a one-time upfront premium.
- Combination of monthly premiums and one upfront payment.
What can I do to avoid PMI?
There are a few ways to avoid paying for private mortgage insurance:
- Save more money by waiting to purchase a home; this will allow. You to afford a larger down payment and prevent the need for PMI.
- You could ask the lender to pay your mortgage insurance: some lenders are willing to do this, although it’s called ‘lender-paid mortgage insurance’ (LPMI). The problem is that you might have a higher interest rate on your mortgage if you take this offer.
- You could get two mortgages instead of one. This is most often done in an 80/10/10 split, with an 80% first mortgage, 10% second mortgage and a 10% down payment.
- Find a lender that has a mortgage insurance policy of its own: Some lenders provide low down payment loans without PMI for first-time homebuyers, low-income individuals, and people with specific professions like physicians and teachers.
- Use a Department of Veterans Affairs (VA) loan: If you meet the requirements for a government-backed loan through the Department of Veterans Affairs, you may be able to borrow without having to put down money and avoid paying PMI.
- Apply for a USDA home loan: You may be able to apply for a USDA home loan or Affordable Home Insurance if you are a low- or moderate-income buyer and live in a qualifying rural location. And These loans generally have low or fixed interest rates and don’t have an objective maximum amount.
When does PMI end for me?
If you take out an FHA loan to buy your home. You may have to keep paying for the entire term of the loan. If you go with a conventional private lender instead, usually once your home has reached 20% equity- either based on appraised value or purchase price (whichever is lower). There are four ways overall to remove PMI from your mortgage:
- You may request, in writing, to cancel your PMI once you owe less than 80% of the original loan. To do so, you must be current on your payments and have a good payment history. The lender may require that you provide proof the value of the home has not decreased and that there are no other mortgages or liens against it.
- The mortgage insurance servicer must automatically terminate PMI once the principal balance reaches 78% of the original home value.
- Refinance: If you have met a lender’s criteria and owned your property for at least five years, you may be able to refinance your existing mortgage into a new loan in order to get rid of PMI. If the amount of money that you owe on your new loan is at least 80% lower than the market value of your home, refinancing may be an option.
Always keep in mind that private mortgage is for lender protection. If you are not able to keep up with your mortgage payments. This will damage your credit score and could cause. You to default on the loan terms which may result in repossession of your home.
Do I need homeowners insurance if I have a mortgage? lender may demand it if you want to obtain a mortgage. If you don’t have a mortgage or have already paid off your debt. You should still get homeowners. You would be financially responsible for any losses to your home if you don’t have it.