Mortgage insurance vs. homeowners insurance: What’s the difference?

Homeowners insurance and mortgage insurance sound similar, but they’re very different. One protects your home, and the other protects your mortgage lender.

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Knowing the difference between mortgage insurance vs. homeowners insurance can ensure that you’re properly paying for and protecting your home. (Shutterstock)

Homeowners insurance and mortgage insurance are both part of the homebuying process, though they have key differences — mainly, who each type of insurance protects.

It’s important to understand the difference between mortgage insurance and homeowners insurance, whether this coverage is optional, and how you’ll pay for each. You may also need to know about an additional type of insurance coverage: mortgage protection insurance.

Visit Credible to learn more about home insurance and get quotes from multiple carriers.

Mortgage insurance vs. homeowners insurance: What’s the difference?

While both mortgage insurance and homeowners insurance can be part of the homebuying process, they’re different in many ways, including:

  • Homeowners insurance protects your property.
  • Mortgage insurance protects your lender.
  • You’ll almost certainly need to secure homeowners insurance, especially if you have a mortgage.
  • You may not be required to purchase mortgage insurance if you have a large enough down payment.
  • Private mortgage insurance tends to be more expensive than homeowners insurance.

What’s private mortgage insurance (PMI)?

Private mortgage insurance, or PMI, is an insurance policy that you might have to pay for if you take out a conventional mortgage loan and your down payment amount is less than 20%. PMI ensures that your mortgage lender will receive full compensation if you default on your mortgage payments. If you’re required to pay PMI, your mortgage lender will get a PMI policy from a private insurance company and pass the cost on to you, the homeowner. 

If you have less than 20% to put down you could consider taking out a government-backed FHA loan or USDA loan instead of a conventional loan. While you won’t pay PMI for a government-backed loan, you should keep in mind that FHA or USDA loans may still require you to pay an upfront mortgage insurance premium, or MIP. 

What does private mortgage insurance cover?

Private mortgage insurance covers the amount of the loan and any associated costs that the lender would incur if the home was foreclosed on. 

Is PMI required?

Lenders don’t require private mortgage insurance for every home purchase. Generally, lenders require PMI if:

  • You take out a conventional loan and your down payment amount is less than 20%.
  • You have a poor credit score or insufficient credit history.
  • You’re securing a cash-out refinance loan that exceeds 80% of your home’s value.

Some lenders may offer conventional loans that don’t require PMI, even if your down payment is smaller. But these loans typically come with higher interest rates.

How much does PMI cost?

PMI costs vary by lender and homebuying situation. The cost of PMI can range from 0.5% to nearly 6% of your principal loan amount, according to the Texas Department of Insurance.  

The good news is that you won’t have to pay PMI for the duration of your mortgage — once you’ve paid down the loan principal to reach 20% equity in your home, you can remove PMI from your mortgage. You can accomplish this by waiting for the lender to automatically cancel your PMI, requesting that your lender cancel PMI, getting a new appraisal on your property, or refinancing your mortgage. 

What’s homeowners insurance?

Homeowners insurance is an insurance policy designed to cover your home in the event of damage or loss. When you file a claim, the insurer will pay you directly (if your claim is approved) versus PMI, which pays your lender if you default on your mortgage.

Depending on where you live, the size and construction of your home, and other factors, the cost of homeowners insurance — and how much of it you need — can vary widely.

It’s important to shop around to make sure you’re getting the best home insurance policy for your needs. You can use Credible to get home insurance quotes from multiple carriers in minutes.

What does homeowners insurance cover?

Every homeowners insurance policy provides different levels of coverage, depending on the insurance company, state you live in, and other factors. In general, you should seek out a policy that covers the following aspects of your home:

  • Dwelling — This coverage will pay for the cost to repair or rebuild your home if it’s damaged by fire, hail, hurricane, lightning, or other covered natural disasters in your policy.
  • Other structures — Structures include elements like fences, detached garages, or gazebos that are damaged by weather or vandalism.
  • Flood — Flood insurance is a type of hazard insurance required for homes within a flood zone.
  • Personal property — This covers all personal belongings within the house, like computers and furniture. Personal property coverage will typically only reimburse you up to 80% of the property’s value.
  • Liability — This coverage protects visitors of your home in the event that they, or their property, are injured on your property.

Keep in mind that these are only a few types of homeowners insurance coverage available. Talk to your insurance agent to find the best coverage for your needs.

Is homeowners insurance required?

When you purchase a home, your mortgage lender will most likely require you to get homeowners insurance coverage. Since your lender has a financial interest in your home, it’ll want to make sure that this asset is protected. It’s technically not illegal to own a home without homeowners insurance, but it’s unlikely that a lender will allow you to qualify for a mortgage without it. 

You can cancel your homeowners policy after you pay off your mortgage, but this isn’t a good idea. It’s wise to keep such a vital investment adequately insured, even after your mortgage is paid off. If you were to cancel your homeowners insurance, you would be entirely responsible financially to repair or rebuild in the event of a disaster.

How much does homeowners insurance cost?

Like PMI, homeowners insurance costs will be unique to your home and situation. Average homeowners insurance premiums vary, though the average cost was $1,249 per year in 2018, according to the Insurance Information Institute. 

Mortgage insurance vs. homeowners insurance: How do you pay it?

You’ll typically pay mortgage insurance and homeowners insurance as part of your monthly mortgage payment. Here’s how it breaks down:

  • Mortgage insurance — PMI will increase your monthly payment amount. Although PMI is technically a separate insurance policy, it’s held by your lender and you’re required to reimburse the lender for the monthly premiums.
  • Homeowners insurance — Homeowners insurance is a separate policy: The borrower is the policyholder, and you can secure this insurance independently from your lender. Although you can pay your monthly homeowners insurance premium directly to your insurance company, you can also choose to roll it into your monthly mortgage payment. When your lender collects your mortgage payment, it puts the money for your homeowners insurance premium into an escrow account, then your lender pays your insurance company directly. If you don’t have a mortgage, you’ll pay your homeowners insurance premium directly to the insurance company.

If you’re looking for a homeowners insurance policy, Credible lets you get home insurance quotes in minutes.

What’s mortgage protection insurance (MPI)?

You might hear another insurance term thrown around during the homebuying process — mortgage protection insurance, or MPI. This is different from private mortgage insurance, but because their acronyms are so similar, it’s easy to get confused. 

Mortgage protection insurance, also referred to as mortgage life insurance or mortgage payment insurance, provides additional protection to the lender and the homeowner. It’s a type of life insurance that will pay off your mortgage loan if you pass away. Some MPI policies will also cover your mortgage payments if you become disabled or unemployed. 

MPI isn’t required to purchase a house. But it’s something you may want to consider if you can’t secure term life insurance, work in a high-risk career, or have pre-existing health conditions.   

How much does mortgage protection insurance cost?

Mortgage protection insurance policy premium costs depend on a number of factors, including the balance and term length of the mortgage, the location of the home, and the age and gender of the policyholder. For many homeowners, MPI is easy to qualify for and often more affordable than a term or whole life insurance plan. But it’s important to remember that MPI policies aren’t as flexible as other life insurance plans and will only cover mortgage payments.

If you’d like to explore MPI policies, you can find them online or in person from many life insurance providers, insurance companies, and even your mortgage lender. As with any insurance policy, it’s important to shop around and get multiple quotes before deciding on a policy that’s right for you.