Hey there, future homeowners! As you step into the world of real estate, two terms you’ll come across are mortgage insurance and homeowners insurance. While they might sound similar, they serve distinct purposes. Let’s break down the differences between these two types of insurance so you can navigate the home buying process with confidence.
Mortgage Insurance
What It Is
Mortgage insurance helps protect lenders if you default on payments. It’s required when you make a down payment of lower than 20% on a conventional loan.
Why You Might Need It
If you’re unable to make a sizable down payment, mortgage insurance allows you to qualify for a home loan with a smaller payment. It offers financial security to lenders, making them more willing to lend to borrowers with lower down payments.
Cost
The cost of mortgage insurance is typically a percentage of your loan amount and is added to your monthly mortgage payment. The exact cost varies based on factors like your credit score, loan-to-value ratio, and the size of your down payment.
Homeowners Insurance
What It Is
Homeowners insurance protects the homeowner from financial loss due to loss or damage of property. It covers both the structure of your home and your personal belongings.
Why You Might Need It
Homeowners insurance is required by most lenders to protect their investment in your property. Even if it’s not required, having homeowners insurance is crucial to safeguard your home and belongings from unforeseen events like natural disasters, fire, or theft.
Cost
This varies based on factors such as the value of your home, its location, the coverage options you choose, and your claims history. It’s typically paid as an annual premium, although some homeowners choose to pay it monthly.
Key Differences
Purpose
Mortgage insurance primarily protects the lender, ensuring they’re compensated if you default on your mortgage. Homeowners insurance protects you, the homeowner, from a range of perils that could damage or destroy your property.
Coverage
Mortgage insurance doesn’t provide any coverage for your property; it only covers the lender’s financial risk. On the other hand, homeowners insurance covers the structure of your home, your personal belongings, liability in case of accidents on your property, and additional living expenses if your home is uninhabitable.
When You Can Cancel
You can typically cancel mortgage insurance once your loan-to-value ratio reaches 80%, meaning you’ve paid down your mortgage to 80% of your home’s original appraised value. Homeowners insurance, however, is an ongoing requirement for the duration of your homeownership.
