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Mortgage Insurance versus Homeowners Insurance

By Nina Terenzi, Dec. 06, 2022
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Purchasing a house can be a challenging experience especially for first time home buyers. Questions around insurance are especially common during the mortgage application process because the terms “mortgage insurance” and “homeowners insurance” appear frequently in documents though rarely with accompanying definitions. It’s important for home buyers to understand the difference between these two insurance types because they differ in terms of who they cover as well as how and when they are paid. Below is a general introduction highlighting why each insurance type is needed, what it helps protect, and when it is typically purchased in the home buying process. If you’re buying a house, be sure to carefully consult your mortgage lender, attorney, and Eastern Insurance representative to make sure you understand how various insurance types may benefit you.

Mortgage Insurance, aka PMI

Mortgage insurance, also known as private mortgage insurance or PMI, is insurance that some lenders require to protect their interests in case you default on your loan. In other words, PMI protects the lender—not you, the borrower.

Requirements for mortgage insurance

House buyers making a down payment that is less than 20 percent of the purchase price are typically required to pay PMI. The requirement and amount vary by lender and loan product. Depending on your situation, you may be allowed to forego PMI even with a smaller down payment. If your lender tells you that PMI is called for, it’s worth asking whether you may qualify for any exceptions—though be aware that exceptions are rare.

How mortgage insurance is paid

Mortgage insurance is never included in the mortgage loan itself. It is an insurance policy—a completely separate transaction. The two traditional methods of paying PMI are to make an annual lump sum payment up front or pay overtime using monthly installments. That said, many home buyers opt to have the monthly cost of their PMI premium rolled into the monthly mortgage payment. In this scenario, you make one payment to your mortgage lender, who deposits those funds in an escrow account out of which they pay your insurance provider. The Consumer Financial Protection Bureau provides up-to-date details about PMI and how it is calculated.

PMI may not be forever

Plans vary, but many are written in such a way that you may stop paying PMI once you attain 20 percent equity in your home. Discussing whether this option exists before you sign a mortgage agreement will help you make the best decisions for you and your family.

Homeowners Insurance

Homeowners insurance protects home buyers from physical damage and loss. It also protects the value of the lender’s investment. That’s why mortgage lenders typically demand that all borrowers buy homeowners insurance. The specific terms of homeowners insurance are dictated by variables specific to each property and policy. Unlike mortgage insurance, the amount of down payment paid against the loan does not influence homeowners insurance policies at all.

Requirements for homeowners insurance

Anyone who takes out a mortgage loan to buy a home is generally required to purchase homeowners insurance and keep it current throughout the life of the loan.

Homeowners insurance “should” be forever

Once the mortgage has been paid and the deed belongs to the homeowner, maintaining homeowners insurance is highly advised though no longer legally mandated. Some of the many ways in which homeowners insurance protects homeowners even after their mortgage has been paid may include coverage for:

  • Repairing or rebuilding the physical home after a covered event such as a break-in, lightning storm, tornado, hurricane, or fire,
  • Replacing or repairing stolen or damaged possessions,
  • Temporary lodging costs if your residence is uninhabitable due to a covered event,
  • Protection from liability claims such as slip-and-falls on your property.

How homeowners insurance is paid

There are essentially three ways to pay homeowners insurance: in an annual lump sum paid directly to the provider, monthly payments made directly to the provider, or—as with PMI—bundling the insurance premium together with the mortgage loan payment. In the latter scenario, the home buyer pays the lender who typically holds their funds in an escrow account out of which they pay the insurance premium (and sometimes property taxes). No matter how the plan is paid, the insurance policy is never an actual part of the mortgage.

Mortgages and mortgage insurance are not one-size-fits-all

Making at least a 20 percent down payment when taking on a mortgage is generally considered wise—you’ll be financing a smaller principal amount, payments will likely be lower, and you may pay off the loan more quickly, and with less overall interest. However, not everyone can afford to do so. Deciding to pay PMI may be a sound decision if it helps you buy the home of your dreams as long as you can afford the real costs over time. Whatever you choose, you’ll need a comprehensive homeowners policy to protect your home—a valuable asset and potential source of lifetime security and comfort for you and your loved ones.

Review your options with a trusted advisor

You don’t need to be an insurance expert to make the best decisions about protecting your home, you just need to have a knowledgeable and trusted insurance agent to work with. While mortgage insurance is offered through your lender, you can talk to an Eastern Insurance Group representative to learn more about homeowners insurance, and other ways to protect your home. Call 800-333-7234 or complete our quote request form today.

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