Both homeowners insurance and mortgage coverage can increase the cost of property ownership. You’re likely encountering both during the mortgage application process. But that’s about where the similarities end.
The basic difference is that Homeowners Insurance covers your house and its contents while PMI (also known as private mortgage insurance or PMI) protects you mortgage lender if you are unable to make your mortgage payments.
Takeaways from the Key Notes
- Mortgage insurance is different from homeowner’s insurance.
- Your home, its contents and you are protected by homeowner’s insurance in the event of a lawsuit.
- Mortgage insurance is also known as private mortgage insurance. It protects your lender, such as the bank, if you are unable to make your mortgage payments.
- Many homeowners insure themselves against unexpected costs.
- If you make a downpayment of less than 20 percent or take out an FHA mortgage, you will have to pay PMI.
Mortgage Insurance vs. Homeowners Insurance
Although homeowners insurance and mortgage coverage sound the same, they are actually very different. Here is a short description of each.
What is Homeowners Insurance?
Homeowners’ insurance is a type of property insurer that protects your home from any damage caused by unforeseeable events. Most homeowners’ insurance policies also protect you against lawsuits in the event that someone is injured on your property. This insurance also covers your property and home against damage or loss related expenses. It is ideal for those who want to protect their home and possessions.
Your homeowners policy may cover:
- Home’s structure
- Personal belongings
- You, your family, and your pets are liable in lawsuits if you or they cause injuries to others.
- Medical costs if you or someone in your family is injured
- Additional living expenses during the time your home is not habitable
However, there are limitations. There are limits, though.
What is Mortgage Insurance?
PMI, or private mortgage Insurance (PMI), differs from the other types of insurance. It is an insurance policy that protects the lender, such as a bank, in case you are unable to make your mortgage payments.
The homeowner pays a certain percentage of the total cost of their mortgage each year. If they cannot make their mortgage payments, then the insurance company pays the lender. The cost of home ownership can be increased by adding PMI to monthly bills. 2
Mortgage insurance protects the lender and not the homeowner.
The Differences
These are the main differences between two types of insurance:
| Homeowners Insurance | Mortgage Insurance | |
| Covers | Mortgage lender directly and homeowner directly | Mortgage Lender |
| Does not cover | Standard homeowners insurance policies typically exclude coverage for damage to property caused by arson, floods, sinkholes and mudslides. | Homeowner |
| Need for | Borrower who finances their home purchase | Borrower who pays a smaller down payment (usually less than 20%) |
| Payment Form | In general, the policyholder will pay the premiums directly to the insurer or mortgage company. The latter then pays for the homeowners’ insurance out of the escrow accounts managed by the lender. | The lender sets the monthly payment and/or the closing cost percentage for the borrower. |
| Cost per year | Average annual income of $1,251 for the entire nation | Costs are determined by three factors: your Credit Score and your Loan-to-Value (LTV). The cost of a $250,000 property ranges between $1,091 and $1,747 a month. |
Do I need homeowners insurance or mortgage insurance?
The type of insurance that you need will depend on the kind of mortgage, your down payment and how far you are from paying off your mortgage.
Do I need home owner’s insurance?
The majority of homeowners carry some form of homeowners’ insurance. This is partly because mortgage lenders require homeowners to have homeowners insurance in order to obtain a loan. The lenders want to protect themselves in the event that your home is destroyed or irreparably damaged. The Mortgagee Clause achieves this by requiring that the insurance company pay the lender.
Many people continue to pay their homeowners insurance even after they have paid off their mortgage. The high cost of replacing homes and the expensive lawsuits can make homeowners insurance a good investment. The monthly premiums are much lower than the cost of rebuilding your home, replacing all your belongings or being sued for a visitor’s injury.
Do I Need Mortgage Insurance?
The answer depends on your lender.
Borrowers are normally required to take out mortgage insurance when they supply a down payment of less than 20% of the home’s purchase price. This applies if you’re taking out a conventional loan, or if you’re refinancing your home and the equity is less than 20% of its value. For Federal Housing Administration (FHA) mortgage loans, a mortgage insurance premium (MIP)–the equivalent of PMI–is always required.
This is because lenders regard mortgages backed by less than a 20% down payment as risky, and they want protection in case you can’t meet your payments.
You can, however, cancel your PMI once you’ve paid off a good percentage of your mortgage. The rules in this regard vary, so check with your lender about their rules. In general, the earliest that you can cancel your PMI is when your principal balance falls to 80% of your home’s original value. This is defined by its contract sales price or appraised value at purchase (whichever is lower). You must have a history of on-time payments and be up to date with your bill when requesting cancellation.3
FHA loans have their own rules. Depending on your loan-to-value (LTV) ratio when you took out your FHA loan, your loan terms may require you to maintain your MIP for 11 years, or for the length of your mortgage.4
Are mortgage insurance and homeowners insurance interchangeable?
No. Homeowners insurance protects your home and its contents. Mortgage insurance (also called private mortgage insurance or PMI) protects your mortgage lender in case you can’t meet your mortgage payments.
Do you always need mortgage insurance?
Typically, borrowers making a down payment of less than 20% of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans.
How can I avoid PMI?
One way to avoid paying PMI is to make a down payment that is equal to 20% of the purchase price of the home. Don’t try and avoid buying PMI if you are obligated to. In that case, your lender can buy it for you and then charge you, which may be more expensive than getting it yourself.
The Bottom Line
You will encounter both homeowners insurance and mortgage insurance as you work through the mortgage process, but they are very different types of insurance.
Homeowners insurance protects your home, its contents, and you in case of lawsuits. Mortgage insurance, also called PMI, protects your lender (the bank, for instance) in the event that you can’t meet your mortgage payments.
Most homeowners have homeowners insurance, because it can make good financial sense to protect yourself from unexpected costs. You will be required to purchase PMI–on top of your mortgage–if your down payment is less than 20% or if you take out an FHA mortgage.
Adsrocks requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
- Consumer Financial Protection Bureau. “What Is Homeowner’s Insurance? Why Is Homeowner’s Insurance Required?”
- Consumer Financial Protection Bureau. “What Is Private Mortgage Insurance?“
- Consumer Financial Protection Bureau. “When Can I Remove Private Mortgage Insurance (PMI) from My Loan?“
