Understanding Mortgage Insurance and Homeowners Insurance

Mortgage insurance and homeowners insurance are two forms of insurance that can increase the cost of owning a home, and you may come across both during the mortgage application process. However, the similarities between them end there.

This is the main difference. Property insurance protects your home and its contents. Mortgage insurance (sometimes called PMI) protects your lenders if you default on your payments.

Homeowners Insurance

Homeowners insurance protects your home and belongings from damage caused by the unexpected. Additionally, most home insurance policies protect you from legal action if someone is injured on your property. It also protects the home and contents in your home from damage and damage-related expenses. This policy is perfect for anyone who wants to protect their home and possessions.

Home insurance can cover the following:

• House structure

• Personal items

• Liability for harm to others caused by you, your family and your pets

• Medical bills if someone is injured at home

• Additional living expenses if the home is uninhabitable

However, there are some limitations. Standard home insurance plans typically do not cover mold, floods, earthmoving such as landslides and earthquakes, and overflow or blockage of sewage or drains.

Mortgage Insurance

Mortgage insurance (often called PMI) is a separate type of insurance. This is a policy that protects lenders, such as banks, if you default on your mortgage.

PMI is usually paid as a percentage of the homeowner's total mortgage loan amount each year. If they can't pay the mortgage, the insurance provider pays the lender. Adding private mortgage insurance to your monthly expenses can make owning a property more expensive.

Is Homeowners Insurance Necessary?

Homeowners usually have some type of insurance. This is because lenders often require individuals to have home insurance to qualify for a mortgage. On the other hand, many others buy home insurance for their own reasons, continuing to pay even after the mortgage is paid off.

Home insurance can be a wise investment due to the high cost of replacing a home and high litigation costs. In the event of a covered event, or if you are charged for a guest injury, the monthly premium may be a fraction of the cost of rebuilding the home or replacing everything.

Is Mortgage Insurance Necessary?

The answer depends on your mortgage lender.

If the down payment is less than 20% of the house price, borrowers usually need to purchase mortgage insurance. This is the case when you take out a traditional loan or refinance a home with less than 20% equity. Federal Housing Association (FHA) mortgages are always required to be equal to PMI's Mortgage Insurance Premium (MIP).

This is because mortgage lenders consider mortgages with a down payment of less than 20% to be risky, and they want to be covered if you can't make your repayments.

When going through the mortgage process, you will come across mortgage and homeowners insurance, but they are two different types of insurance.