These two types of insurance both deal with your home, but in very different ways. Learn what they do.
The Difference between Mortgage Insurance and Home Insurance
If you’re a first-time homebuyer, there’s a good chance you’ve come across the term “mortgage insurance.” And if you’re like a lot of homebuyers we talk to, you’ve probably wondered how it’s different from homeowners insurance.
Let's look at both types of insurance so you can understand whether you need either or both.
Home Mortgage Insurance: Lender Protection for Down Payments below 20%
Most of us have to buy homes with help from a mortgage loan, usually issued by a bank or credit union. Essentially, the bank fronts you the money for the cost of the house and you make regular payments on that loan (mortgage payments) until you’ve paid it off or until you sell the home.
But in most situations, banks don’t want to lend people hundreds of thousands of dollars without any collateral. That collateral is typically called a “down payment” and is usually measured as a percentage of the total cost of a home.
If a borrower can put 20 percent of the home’s cost “down,” banks don’t require mortgage insurance. That’s because, if a borrower misses a payment, the bank has a decent pile of cash already. If it has to foreclose on the house and resell it, there’s a reasonable chance its costs will be covered, thanks to that down payment.
If a borrower makes a down payment of less than 20 percent, lenders require mortgage insurance. This is a policy that helps lenders manage the risk that a borrower will stop making payments on their mortgage loan (aka default on the loan).
It’s in lenders’ best interest to make paying mortgage insurance easy, so borrowers usually have several payment options. One of the most popular is to pay monthly, as part of a bundle with your mortgage payment.
To summarize, home mortgage insurance is a policy that:
- You, the borrower, pay.
- Protects your lender from the risk that you’ll default on your loan.
Now let’s take a look at homeowners insurance.
Homeowners Insurance: Protection for Property Damage and Liability
Homeowners insurance is a policy that covers you, the homeowner, for various things that could go wrong on a property you own. (You’re considered the owner even if you buy a property with a mortgage loan.) A typical homeowners policy offers protection for:
- Damage to the home’s structure from certain events.
- Theft of or damage to your possessions that you keep inside your home.
- Liability you may have related to injuries or property damage that happens to guests at your home.
As the homeowner, you want to be protected for a wide range of things that can go wrong at your house.
But you may have noticed that, on your mortgage loan paperwork, your lender only requires you to have “hazard insurance,” meaning insurance that covers physical damage to the home itself. That's because the lender wants to protect its interest in the property.
In other words, your lender fronted a bunch of money so you could buy your home. Until you’ve paid that money back, it wants to make sure you have a way to repair the home if something terrible happens to it. If you don’t, it won’t be able to resell the home and could lose a lot of money. So it requires hazard insurance. It doesn’t matter to the lender what happens to all your stuff because it wouldn’t resell that anyway.
Whether you’re considering your first mortgage or have owned a home for decades, finding the right insurance is crucial to protecting yourself. If you’re not happy with your current homeowners insurance (price, customer service, etc.), get a quote from Kin. It only takes a minute or two and it could save you some serious money.