Mortgage Insurance vs. Homeowners Insurance: What You Need to Know

Homeowners insurance protects the homeowner (and the home), whereas mortgage insurance protects the lender. Click here to learn more.
Written by Bonnie Stinson
Reviewed by Melanie Reiff
Homeowners insurance protects the homeowner, the house, and the property therein. Mortgage insurance, also called “PMI,” is paid for by the homeowner but protects the lender in case the homeowner defaults on mortgage payments. 
Buying a home sure is exciting—but it can also be confusing. What type of coverage do you need as a homeowner? Do you pay for the policy upfront or is it monthly like a car payment?
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Here is Jerry’s overview of the key differences in mortgage insurance vs. homeowners insurance.
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Mortgage insurance vs. home insurance

The major difference between these two types of insurance is who is protected. Mortgage insurance protects the lender (who holds the mortgage) while they are invested in your property. 
On the flip side is homeowners insurance, which protects the person who bought the home and took out the mortgage against damage to or loss of the house. 

What is mortgage insurance?

Mortgage insurance is also known as PMI, or private mortgage insurance. This policy protects the lender if the borrower cannot repay the mortgage. The borrower still pays for the policy.
A borrower who takes out a conventional loan may be required to pay for PMI if they can only afford a small down payment (i.e., less than 20%). Offering a smaller down payment usually indicates a less stable financial situation—and thus a higher risk of defaulting on the loan. 
Once a borrower has repaid a certain amount, though, they become eligible to cancel the PMI. 
There is a notable exception: borrowers with FHA and USDA loans who pay less than 20% down usually have to pay for MIP and cannot cancel it until the mortgage is paid in full. 
Key Takeaway: PMI, or private mortgage insurance, protects the bank or lender—but you pay for it. If you can’t make your mortgage payments, PMI will kick in to help repay the lender for their losses. 

What is homeowners insurance?

This policy offers financial and liability protection for you, the homeowner. You can file a claim under your policy to help recoup losses if a covered peril damages your personal property
Without a homeowners insurance policy, you would have to pay out-of-pocket for things like a shed destroyed by a fallen tree or a window broken by a burglar.
There are two important caveats:
  • Your insurance policy will only cover damage amounts that exceed your deductible. This amount is usually around $1,000 but can be higher or lower. 
  • Only named perils will be covered by your policy (unless you have an open-perils policy, which is pretty uncommon). If a situation isn’t explicitly listed in your policy, damage arising from it won’t be covered. 

What does homeowners insurance cover?

While every policy is different, most homeowners insurance covers similar things:
  • Your primary dwelling and detached structures (replacement cost)
  • Your personal belongings like furniture, clothing, electronics (ACV or replacement cost)
  • Personal liability from lawsuits if someone sues you after an accident on your property
  • Some living expenses if you are displaced temporarily from your home
Here are some of the most common perils covered by homeowners insurance:
  • Vandalism and malicious mischief
  • Theft
  • Fire and smoke
  • Windstorms and hail
  • Water damage (but not flood damage)
  • Weight of ice, snow, or sleet
  • Lightning strikes
  • Explosion
  • Aircraft or vehicle
Let’s review the key differences between homeowners and mortgage insurance:
Homeowners insurance
Mortgage insurance
Damage arising from named perils. Helps the homeowner
Financial losses due to a homeowner defaulting. Helps the mortgage lender
Required for:
Borrowers financing a home
Borrowers who offer less than a 20% down payment
Payment form:
Policyholder pays the insurance company directly or pays the mortgage lender, who pays the insurance company
Policyholder pays monthly installments and/or a percentage of closing costs set by the lender
Average annual cost:
$1,300 annual premium to cover $250k in dwelling coverage
0.58% to 1.86% of the loan amount

How to get mortgage insurance (PMI)

You have to meet some minimum criteria of financial well-being to be approved for a mortgage. This includes:
  • Regular income
  • Good credit
  • A healthy down payment (at least 20% of the sale price)
PMI is usually a requirement when you take out a conventional home loan with less than 20% down. Similarly, refinancing can trigger the need for PMI if your home equity is less than 20%.
In many cases, your lender will arrange for PMI through a private insurer. If you need to find a policy yourself, you can start by asking your home or auto insurer—many top providers offer PMI.

How much does PMI cost?

You can expect to pay somewhere between 0.58% and 1.86% of the full loan amount for PMI—plus monthly fees upwards of $50 for every $100,000 you borrow. 
This payment is often broken down into smaller pieces and added to your monthly mortgage bill. However, you can also pay it off as a lump sum upfront when closing on a property.
Here are three ways to pay for PMI:
  • A one-time payment of the entire fee, payable when you close
  • Monthly payments added onto your mortgage payments
  • A combination of an upfront payment and ongoing monthly premiums
Terms will vary depending on your lender. Check with them about terms, dates, and payment options.

How can I avoid paying PMI?

If you want to avoid paying PMI, you have a few options:
  • Save up a larger down payment. Wait a little longer and save up more money. A larger down payment could convince your lender to forego requiring PMI.
  • Ask the lender to cover the cost. This is called an LPMI (lender-paid mortgage insurance). It can lead to a higher interest rate on your mortgage, so take caution.
  • Work with a lender that has its own insurance program. Many lenders offer special programs to certain types of buyers such as teachers, first-time buyers, or low-income buyers. You won’t have to pay for PMI and you can make a small down payment.
  • Do a
    piggyback mortgage
    . Take out two mortgages instead of one. The first mortgage carries 80% of the value, the second carries 10%, and your cash down payment makes up the final 10%.
  • Try a VA loan. The Department of Veterans Affairs helps make home-buying accessible to veterans, often with no down payment and no PMI.

How long do I have to pay for PMI?

You don’t have to pay for PMI forever. A conventional lender is typically happy to remove PMI once you’ve paid off 20% of the appraised value or purchase price.
Here are the four most common ways to remove PMI from your mortgage:
  • Request termination. If you owe less than 80% on your loan, send a written request to your lender. You must be able to demonstrate consistent payments. You may also be required to prove that the home’s value has not declined.
  • Automatic cancellation. Once you owe less than 78% of the home’s original value, the servicer should automatically cancel PMI. 
  • Halfway point. At the halfway point of your amortization period, the lender is required to terminate PMI. If you took out a 30-year loan, you’ll be eligible at the 15-year mark.
  • Refinance. A new loan with different terms could be a good option for people who have owned their home long enough to qualify for refinancing.  
Pro Tip: It’s never a good idea to skip a payment, even if you’re in financial trouble. This can cause your credit score to tank. Talk to your lender about alternate financing options as soon as you become unable to make PMI payments. 

How to get homeowners insurance

Even if you’re not required by state law or lender stipulations to carry a homeowners policy, you should strongly consider purchasing one. Would you be financially devastated if you lost everything you owned in a fire? If yes, then a homeowners policy is for you.
Start by reviewing quotes from multiple insurance companies, including your car insurance provider. You can
bundle home and auto insurance
to save money on each. 

How to customize a home insurance policy

You’ll need to choose between an actual cash value (ACV) and a replacement cost policy. An ACV policy only entitles you to the value of your items at the time of loss, while replacement cost pays you the amount necessary to re-purchase a comparable new item.
From there, you’ll need to review what your policy covers and add extra coverage if needed
Some incidents are not normally covered by your homeowners insurance and require separate insurance. Geographic areas that face extremely high risks of natural disasters tend to exclude these disasters from a standard policy (e.g., wildfires in California, floods in Arkansas). 

Finding a good insurance policy

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home insurance
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Your mortgage lender technically co-owns your property until the loan is paid off. If the home is damaged, both you and the lender will benefit from insurance protection.
Sort of. Each mortgage installment you pay goes to an escrow account managed by your lender. The lender then takes money from the escrow account to pay for the mortgage and homeowners insurance.
Save an average of 18% by bundling your home and auto insurance
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