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Mortgage Insurance vs. Homeowner Insurance: What’s the Difference?

We quit searching high and low for a much-obsessed-over house buying guide. Because, unfortunately, one did not really exist—so we hit the reset button and set out to develop one.

The top attribute of our coveted home buying guide was home insurance.

Every buyer will need some type of home insurance to cover themselves against serious events or if they don’t want to lose their dream home at closing. Therefore, we will review home insurance and how it can help you.

Finding the right home insurance can be like finding a soulmate

Yes, the perfect homeowners insurance can bring you peace of mind—which can feel like a luxury in recent times. However, finding the right insurance products for home buying can be daunting.

You won’t benefit from all homeowners insurance, and not all will protect you. Therefore, getting the right homeowners insurance policy can feel like a one-in-a-million shot.

So, let our pain be your gain regarding home insurance.

In the insurance world, you’ll meet some people who’ll give you what you need and others who have additional fees for things you don’t. The tricky part is distinguishing between the differences and the wisdom to walk away from a bad deal.

The primary two insurances you’ll get cozy with during the home buying process are homeowners insurance vs. mortgage insurance. 

1-What is mortgage insurance?

Have you ever bought a car and the finance manager wanted you to get something that’d protect the auto company if you stopped paying? Likewise, mortgage insurance protects the lender or titleholder—not you.

If you stop paying, pass away, or can’t make the mortgage terms, a mortgage insurance policy ensures the mortgage lender will still get their money.

Your mortgage loan is a debt. It’s what you owe to a mortgage lender.

For example, if the home you’re looking at is $300,000 and you put down $60,000, the rest—$240,000—needs to be covered by the mortgage insurance.

When do you pay for mortgage insurance?

There’s no need to stress when or how to pay for mortgage insurance since it’s an additional cost included in your monthly mortgage payment.

Generally, you would get charged for mortgage insurance if you make a down payment of less than 20% of the purchase price. If mortgage lenders see you investing a low down payment, say 10%, they might think you’re more likely to walk away from your mortgage loan.

The actual monthly payment is related to the loan amount and terms. So, for example, if you’re getting a home at a slightly higher price—the loan and mortgage insurance rate might be more.

Mortgage insurance protects who, exactly?

Private Mortgage Insurance (PMI) is insurance that protects the lender—not you—if you default on conventional loans.

Suppose the mortgage loan comes from a private company or institution; it’s private mortgage insurance and not simply mortgage insurance, so the rates, terms, and monthly payment change.

How much is PMI?

Typically it’s around 0.5 to 1% of your total mortgage loan amount. According to Bankrate, Freddie Mac says this is about $30 to $70 included in your monthly mortgage payments depending on the purchase amount and down payment, but it’ll likely be an annual payment.

Mortgage Insurance Premium (MIP)

Suppose you have under a 620 credit score and still want a mortgage loan.

You might qualify for a Federal Housing Administration (FHA) loan with a Mortgage Insurance Premiums (MIP). It’s a government-insured loan typically for first-time homebuyers. The government guarantees FHA loans because a lower credit score is more risk for a lender.

How is a MIP for FHS loans split up?

MIPs for FHA loans have two parts: Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP.

On closing day, you have to pay for the UFMIP, which usually amounts to 1.75% of your loan amount.

For example, if the house you’re looking to buy is $500,000, the UFMIP you’ll pay at closing costs is $8,750. An annual MIP of 0.85% is generally included in your yearly mortgage payments.

Which is better, PMI, MIP, or UFMIP?

It depends. Often, you don’t get to choose your mortgage insurance rates.

If your credit score is as low as 500, you might need an FHA loan. In that case, you’ll get a MIP with a UFMIP (there’s no way to avoid this upfront payment or fee).

Meanwhile, you need to make a 10% deposit for the annual MIP. Unfortunately, even after completing the 10% down, you’ll wait eleven years before you stop making yearly insurance payments.

On the other hand, if you have a 620 or above credit score, you can get a conventional loan and pay the PMI if you put down less than 20% of the purchase price.

How to avoid PMI

Paying additional insurance fees can put a bad taste in any serious home buyer’s mouth. So, if you want to avoid a PMI, then make a 20% down payment or more. Plus, you’ll pay less in interest over the life of your loan.

PMI is a not a forever cost

If you put down 10% of your home’s purchase price, then there is 10% that needs a PMI.

So, for example, if the home you’re purchasing is $800,000 and you put down 10%, which is $80,000, you will have a PMI amount on the other 10% to reach the golden 20% down payment mark.

Once you reach the 20% mark, you can call the mortgage company and request the PMI removed from your mortgage payments. They might do this automatically, but it’s always good to check.

2-What is the difference between mortgage insurance and homeowners insurance?

Like auto insurance protects you against damage during an accident, homeowners insurance does something similar. It could offset the expenses if something were to go wrong in or around your home.

So even with the off chance someone sues you if they slip and fall around your house, homeowners insurance can protect you and cover legal costs.

When do I need to get homeowners insurance?

The shirt answer is asap—the long answer: between the purchase agreement and closing day.

If you do not have proof of homeowners insurance (whether that’s the mortgage insurance required or an insurance binder that protects you in the interim), you’ll lose the home.

Mortgage lenders and brokers require homeowners insurance before you sign closing disclosure paperwork. You can choose the insurance company to get the best policy without a home inspection. However, an insurance agent will interview you or send you a list of questions.

Some questions a homeowners insurance agent might ask are:

  • How many bedrooms does the house have?
  • Is there an attached and covered garage?
  • Is there a fireplace?
  • How many square feet is the home?

Be honest with your answers. You do not know what kind of answers will get you the lowest rate (unless you’re an insurance agent). Besides, a home inspection will uncover the answers to all the above questions, and being honest is best when buying a home.

Who does homeowners insurance really protect?

Homeowners insurance protects the buyer against most things, like fire, flooding, and home issues. Although homeowners insurance covers most cases, it might not cover damage caused by natural disasters and war. So ask about getting a “rider” for the gaps if you need additional coverage.

In the future, if your home is damaged, the lender will not make their money back if it’s uninsured. However, the insurance company can help fix the issues, so if you need to sell, the lender knows at least the house is still in good to excellent condition.

Does mortgage insurance and homeowner insurance cost money?

Yes, they both cost money.

However, mortgage insurance is added to your annual mortgage payments, while homeowners insurance is a separate cost, an annual or quarterly cost. In addition, some of the insurances we covered can appear at closing costs—like UFMIP.

Insurance is to protect people from unforeseen events in the home buying process. Whether it protects a lender or a homebuyer, it can help to instill a mellower state of mind.

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