Homeowners Insurance vs. Mortgage Insurance
For many people, buying a home represents the most significant purchase they’ve made in their lives thus far, and it will likely rank quite high going forward as well.
In some cases it will be the defining expense of their life.
But regardless of which specific category you fall into, there’s no denying that it’s massively important. As such, you should want to provide your home with a bulwark of protection against the financial difficulties that arise in the face of any serious damage to the house or its contents.
Homeowners vs. Mortgage Insurance: What’s the Difference?
Homeowners insurance represents the most obvious (and, ideally, the most effective) safety net you can throw around your house. If you purchased your home via a mortgage agreement with a lending institution, ensuring that you’re covered in the wake of a fire, exterior damage from hurricane winds, incidents of theft or vandalism, and many other adverse circumstances is even more important.
After all, the house is an investment on the part of the lender as well as you, so they naturally want to protect it
This may lead to certain (understandable) points of confusion for first-time homebuyers, however. Most notable among them is not being sure about the difference between homeowners insurance policies and mortgage insurance. The two coverage types are sometimes intertwined, but they ultimately play different roles. If you find yourself flummoxed by this, don’t panic; you certainly aren’t the first to feel that way!
Let’s take a comprehensive look at the most important areas in which mortgage insurance differs from its homeowners counterpart. We’ll also review a handful of best practices that can help you track down the ideal loan coverage plan for your specific needs.
4 Key Differences Between Mortgage and Homeowners Insurance
In terms of their basic purpose, homeowners and mortgage insurance policies are quite similar: They provide a certain level of surety in the face of risk, as is the intent of any insurance product. But beyond that, they are separated by a number of considerable differences.
We’ve taken the time to detail them here. So if you’re still in the throes of the homebuying process and haven’t closed a deal yet, or are even just beginning your search, be sure to look them over carefully:
1. Homeowners Insurance is Almost Always Required if you Take Out a Mortgage
In the strictest legal sense, you most likely can own a home without taking out a homeowners insurance policy. Setting aside for the moment the fact that you almost definitely should have such coverage, even if you don’t want it for some reason, you’ll almost always be required to purchase it if you bought your home with a mortgage, according to the Insurance Information Institute (I.I.I.). By contrast, the obligation to take out a mortgage insurance policy is much less of a certainty.
As explained by the I.I.I., private mortgage insurance most often comes into play during situations in which mortgage lenders allow buyers to close on home deals without putting down any considerable stake of equity. The idea of the 20% down payment on a mortgage is by no means an across-the-board truism in the world of residential real estate. Countless mortgages are regularly agreed upon each day in which the buyer puts down 10%, 5% or even as little as 3% to seal the deal. This has allowed more people to buy homes who might have been barred from doing so in the past. But that lower down payment almost always comes with an attached requirement that you take out a mortgage insurance policy.
Technically, a lender can require you to purchase a mortgage coverage policy as a condition of the agreement no matter what your down payment is, but for obvious reasons, buyers who pay 20% up front are almost never asked to do this. Paying anything 15% or greater may also be enough to avoid that requirement.
Finally, you’ll never have to pay mortgage insurance if you purchased your home with a loan backed by the Department of Veterans Affairs.
2. Mortgage Insurance is for the Benefit of Your Lender, Not You
While you pay the premiums of mortgage insurance every month the same way you will with those of your homeowners policy. The latter, however, is for your benefit, offering you compensation for repairs necessitated by storm damage. Payout for the former will go to the lending institution with whom you bought your home, in the event that you default on your mortgage, as compensation for the monetary loss they’ve experienced.
Keep in mind that default can occur at any point during the loan term, regardless of how much you paid toward the principal and interest before you started missing payments. It generally takes at least two to three months of missed payments (or 60-90 days) for a lender to declare you in default, and four months or 120 days before a lender can legally start the proceedings for a foreclosure, according to the Consumer Financial Protection Bureau. That said, some states will have laws that dictate different lengths of time for these conditions to apply, and any such legislation will take precedence over whatever the lender might wish to impose.
3. Mortgage Insurance is Not a Long-Term Obligation (in most cases)
For various reasons explained above, it’s in your best interest to purchase and maintain a homeowners insurance policy. You, your family, your house, and all of your combined possessions are the subjects of its protection. Mortgage insurance, meanwhile, can be a real pain in the neck at times, especially because you’re expected to keep track of it in relation to how much of your loan balance you’ve paid down, according to the I.I.I.
Fortunately, you likely won’t have to deal with mortgage coverage payments for anywhere near as long as you’ll be paying your mortgage and keeping up your home insurance premiums. According to certain stipulations of the federal Homeowners Protection Act of 1998, your lender must terminate any private mortgage insurance policy it required you to take out once your loan has reached a loan-to-value ratio of approximately 80%. Lenders are also obligated to drop the mortgage insurance requirement halfway through the term of the loan: If you reach the 15th year of a 30-year fixed-rate mortgage (the most common home loan in the U.S.), mortgage coverage terminates whether the aforementioned LTV has been met or not.
Last but not least, you become entitled to request mortgage insurance cancellation in writing once your mortgage balance reaches 80% of the home’s sale price or appraised price at origination, whichever is less. (This means you’ve paid 20% of the principal along with all associated interest.) While your lender is not obligated to honor your request at this threshold, they almost always will if you’ve never missed a mortgage payment, and often do so if a borrower hasn’t had a payment 30 days late in more than a year.
4. Missing Mortgage Insurance Payments is Less Dangerous than Missing Homeowners Premium Payments
Before we go on, let us make clear that we don’t endorse falling behind on coverage payments, or being anything but timely in the payment of any of your bills. But it is important to note the difference in severity between missing mortgage insurance and home insurance payments.
Making a mortgage insurance payment 30 days late will have little to no effect, as long as you don’t turn this mistake into a habit. If you develop a pattern of late payments, your lender will be less likely to terminate the mortgage insurance policy at the previously mentioned point that you’d ordinarily be entitled to ask for cancellation. Also, the provider of the mortgage coverage itself will be entitled to send your debt to collectors if you fall behind in your payments for a long enough period, in accordance with state or federal laws regarding collections.
Failing to keep up with home insurance premiums brings much more serious and immediate consequences. Missing one payment won’t immediately end your coverage, but it will trigger a grace period: During this time (often 10 days, but longer for some insurers), your coverage won’t lapse, and it’ll remain in place once you rectify the past-due balance. If you blow that deadline, though, your provider is well within its rights to cancel your policy. You can apply for a new policy, but there’s a good chance you’ll have less favorable terms than the lapsed original.
Summarizing the Differences
Mortgage and homeowners insurance are inextricably linked in certain ways, as both have noteworthy roles to play in the homebuying and home ownership processes. Buying a home coverage plan ultimately has greater long-term importance for the well-being of your house and property.