How Are Homeowners Insurance and Mortgage Insurance Different?

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It's easy for new homebuyers to get overwhelmed by the swirl of terms and requirements thrown out by lenders, especially ones that sound similar. But don't let the names fool you—homeowners insurance and mortgage insurance aren't the same thing. What's more, they can affect your budget in very different ways.

While homeowners insurance covers you in the event of physical damage to your home, among other things, mortgage insurance is designed to protect the lender if you fail to make good on your payments.

Homeowners Insurance vs. Mortgage Insurance
What do I need to know?Who does it cover?Is it included in the mortgage?
Homeowners insuranceIt typically protects against property damage, stolen or damaged belongings, or an injury that occurs on the property.The homeownerSometimes. Many lenders fold the cost into the monthly mortgage payment, but you may also be able to pay it yourself.
Mortgage insuranceDesigned for borrowers who put down less than 20% of the home's value, it guarantees that the mortgage will be paid. If you default on your loan, your insurer will pay the lender.The lenderMortgage insurance premiums are included in the monthly mortgage payment. In some instances, borrowers are also required to make a payment at closing.

Let's take a deeper dive into the difference between homeowners insurance and mortgage insurance.

What Is Homeowners Insurance?

Homeowners insurance protects you if your home or belongings are damaged during an insured event—think natural disasters like hurricanes, fires, hailstorms and the like. The majority of policies also cover external structures like garages.

Every home insurance policy is different. For example, most standard policies exclude earthquakes and floods, so you may need to purchase additional insurance if you want one of these types of coverages. Damage that can be traced back to ordinary wear and tear is also typically not covered. On the upside, most homeowners insurance policies will cover some degree of loss if your personal belongings are stolen or destroyed in an insured event.

Homeowners insurance typically extends to liability as well. If someone has an accident or gets hurt on your property, your policy will likely cover legal fees and medical costs. The fine print should clarify out-of-pocket costs you may encounter when filing a claim.

Homeowners Insurance and Your Mortgage

So what does homeowners insurance have to do with getting a mortgage? In most cases, lenders will require you to have homeowners insurance to fund your mortgage. Because they have a financial stake in your home, lenders want to make sure they're protected if, say, a hurricane levels the property.

How much you'll pay for it varies depending on where you live, your deductible, the replacement cost of your home and more. The average premium for the most common type of insurance was $1,211 in 2017, according to a National Association of Insurance Commissioners report. Lenders typically fold the premium into your monthly mortgage payment, but you may be able to request to pay it on your own.

Like anything else, it pays to shop around. Look to your state insurance department, consumer guides, and referrals from friends and family to compare rates and get the best deal.

How Is Homeowners Insurance Different From Mortgage Insurance?

While homeowners insurance covers you if something goes wrong with your home, mortgage insurance protects the lender if you're unable to pay your mortgage. If you run into a situation where you can't make your mortgage payments, the mortgage insurer will take over, which guarantees that the loan gets paid.

In most cases, you don't have a choice of whether you pay mortgage insurance: If you can't make at least a 20% down payment on your home purchase, the lender will require it.

This is no small consideration. The national median price for a single-family home in the first quarter of this year was $274,600, according to the National Association of Realtors. A 20% down payment works out to nearly $55,000. For many would-be buyers, that's a huge barrier to homeownership. So while it can be costly, mortgage insurance is often worth the price for borrowers who need it to get into their desired home.

Is Mortgage Insurance Required?

You can usually sidestep mortgage insurance altogether if your down payment is at least 20%, but the kind of mortgage you get also plays an important part. Here's how mortgage insurance works for these four common types of home loans.

  • Conventional loans: Borrowers who put down less than 20% will likely need to purchase private mortgage insurance (PMI). PMI generally ranges anywhere from 0.5% to 2% of your total annual loan amount, though factors like your credit score and length of the loan also come into play when determining your rate. Many lenders wrap the cost into your monthly mortgage payment and allow you to do away with PMI once your home equity reaches the 20% mark.
  • FHA loans: Guaranteed through the Federal Housing Administration, FHA loans have less stringent requirements when it comes to income, credit score and down payment. However, borrowers are on the hook for paying a mortgage insurance premium (MIP). This translates to an upfront premium of 1.75% of the loan amount, along with an annual fee included in your monthly payment that ranges from 0.45% to 1.05%.

    There's one catch: If your down payment is less than 10%, you'll pay mortgage insurance for the entirety of the loan. One workaround is to refinance into a conventional loan once you hit 20% equity. Meanwhile, borrowers who put down 10% or more can cancel their MIP after 11 years.

  • USDA loans: These loans, which require no down payment, are insured by the U.S. Department of Agriculture and are available in specific rural and suburban areas. In lieu of mortgage insurance, borrowers are required to pay guarantee fees—one upfront fee of 1% of the total loan amount, plus a 0.35% annual fee included in your monthly payment that applies for the life of the loan.
  • VA loans: Backed by the U.S. Department of Veterans Affairs, VA loans are designed for military families and don't require a down payment. Instead of buying mortgage insurance, borrowers pay a funding fee that's either paid at closing or folded into the loan balance. Rates range anywhere from 1.4% to 3.6%.

Will you have to pay mortgage insurance if you refinance your loan? It depends on how much equity you have in your home at the time you refinance. Even if you weren't responsible for paying mortgage insurance on your original loan, you may get stuck with it when refinancing if you have less than 20% equity in your home.

The Bottom Line

Homeowners insurance and mortgage insurance are two very different parts of the homebuying journey. While you'll be hard-pressed to find a lender that doesn't require a homeowners policy, you have more flexibility when it comes to mortgage insurance. Your loan type and down payment carry the most weight here.

A little bit of knowledge goes a long way—and understanding how these two types of insurance are different can only make you feel more confident when navigating the mortgage application process. No matter what, your credit score is an important factor in getting approved for a mortgage. Check your credit score and credit report for free with Experian to get yourself moving in the right direction.