As a new homebuyer, it’s essential to understand the difference between mortgage and homeowners insurance. Mortgage insurance is an add-on that protects a lender if the borrower defaults on their loan. Homeowners insurance is a policy taken out by the homeowner that covers their home in case of damage or theft.
Homeowners’ insurance will cover fire damage, theft, and other natural disasters. It may also cover structural damage caused by fire, flooding, and earthquakes.
Read more: Does Home Insurance Cover Fire Damage?
We will explain the differences and provide you with the facts so that you can make an informed decision.
What Is Mortgage Insurance?
Mortgage insurance provides financial protection to lenders if a borrower defaults on their mortgage loan. It is an additional layer of protection for lenders and helps them offset any losses they might incur if a borrower fails to make timely payments or pays too little. Mortgage insurance can be either private (PMI) or government-backed (FHA, VA, and USDA).
Private mortgage insurance is required by banks, credit unions, and other lenders if the borrower makes a down payment of less than 20% when purchasing the home. Government-backed mortgage insurance helps borrowers who can’t afford to make a sizeable down payment or have lower credit scores.
In general, mortgage insurance is a type of insurance policy the borrower pays to protect the lender from losses. The premium amount depends on several factors, including loan-to-value ratio (LTV), credit score, and other risk factors determined by the lender.
What Is Homeowners Insurance?
Homeowners insurance is also known as hazard insurance or homeowners’ insurance. It is a form of property insurance that covers damage to your home and liability for injuries and losses suffered by others on your property. Generally, homeowners insurance provides coverage for the structure of your house, other structures such as sheds or detached garages, and any personal possessions you have inside. It also typically protects natural disasters, theft, and liability for injuries or property damage you may cause to others.
Critical Differences Between Mortgage and Home Insurance
The most significant difference between a mortgage and home insurance is the type of coverage. Homeowners insurance protects homeowners against losses from damages to their property, such as fire or wind damage. Still, it does not cover loans taken out to purchase the property. On the other hand, mortgage insurance covers losses incurred if a homeowner defaults on their mortgage loan.
Mortgage insurance is required for all mortgage loans, with the cost directly related to the size of the loan and down payment. On the other hand, homeowner insurance is optional but still recommended by most financial advisors to protect your investment in your home. Homeowners’ insurance premiums vary based on several factors, including the age and condition of your home and the type of coverage you select.
Mortgage insurance is available for most loans, including FHA, VA, and conventional. Homeowners insurance is also widely available, but it may not be offered to those who live in certain areas or have unique risks associated with their property.
4) Coverage Period:
Mortgage insurance is typically required for the life of a loan, whereas homeowners insurance can be canceled at any time, provided the insurer has given proper notice. This gives homeowners more flexibility in controlling costs while maintaining financial protection if something unexpected happens to their homes.