Mortgage Insurance vs Homeowners Insurance: Are They the Same?

Becoming a homeowner is always a difficult process. Throughout this journey, you will inevitably find yourself dealing with a whole mountain of paperwork as well as a brand-new glossary of financial terms. Among others, we have noticed two phrases causing a lot of trouble for our clients – namely, mortgage insurance and homeowners insurance. They might sound very alike and appear in mortgage-related blogs, but in reality, they serve completely different goals. At BrickWood Mortgage, we believe in informed decisions, which is why we create detailed guides and provide resources like our mortgage calculator in South Carolina. 

As your reliable mortgage brokers, we wish to clarify some of your common concerns. While mortgage insurance serves only as protection for the lending institution giving you the loan, homeowners insurance protects you as a homeowner as well as your property. Understanding this difference is one of the key aspects of becoming a smart investor.

What is the Purpose of Mortgage Insurance?

First of all, it needs to be mentioned that mortgage insurance is a special financial product intended solely for the protection of the lending institution. If the borrower does not start repaying the credit and defaults on the loan, the lender is at risk to lose a substantial amount of money. Here, mortgage insurance appears. 

It is designed to partially replace losses in case something goes wrong. Let’s answer the common question…is mortgage insurance the same as homeowners insurance? It is crucial to understand that this policy is beneficial to the lending institution alone and has nothing to do with the protection of your finances. Although you pay a monthly fee for this insurance policy, it covers only the interests of the lending institution providing the loan.

What Determines Whether the Lender Will Ask You for Mortgage Insurance?

Typically, your lender will ask for this kind of insurance if you make a down payment lower than twenty percent of the total purchase price of your property. In such a case, the lender will consider you as quite risky and, therefore, demand additional protection. With a conventional mortgage, you’ll be offered private mortgage insurance. 

There also are special types of this kind of insurance for government-backed mortgages – FHA loans have special mortgage insurance premiums. However, once you’ve paid back more than twenty percent of the total price of the property, our specialists will gladly help you file a request for excluding mortgage insurance and thus decrease your housing expense.

Homeowners Insurance and Its Key Characteristics

Contrary to the previous kind of insurance, homeowners insurance was specifically developed to serve you as a homeowner. A home will certainly be the largest investment in your life. Therefore, homeowners insurance serves as protection against any unexpected circumstances that may destroy your house and leave you without a roof above your head. In case of theft, damage, or fire, this policy will pay you back the huge sums required for reconstruction or repair. 

When comparing mortgage insurance vs homeowners insurance, the key point is who receives the protection. As experienced mortgage brokers, we always recommend our clients getting a great homeowners insurance policy since it is the safest option for keeping their property and family secured.

What Does a Standard Homeowners Insurance Policy Cover?

There are several different types of coverage under a homeowners insurance policy. Firstly, there is a dwelling coverage, which is going to be responsible for rebuilding or repairing your house in case of any accidents. Secondly, personal property insurance will be able to replace all belongings stored in your house if they were somehow lost or broken. 

Thirdly, you will have a liability coverage, which will protect you from any claims and possible lawsuits caused by injuries sustained on your property. Lastly, additional living expenses coverage can compensate for hotel and restaurant costs if you will temporarily become homeless due to the insured events.

Why Do I Need to Be Insured?

If you have just obtained a mortgage to finance your home, your lender will definitely demand you having a valid homeowners insurance policy. The point is that the lender must know your property is fully secured and will not burn out tomorrow. However, after paying off your debt, we still recommend maintaining an active homeowners insurance policy. It is really useful and helps to protect your finances.

FAQs

Is It Possible To Combine Homeowners And Mortgage Insurance?

Absolutely not, since those two types of insurance are issued by different companies and are targeted at various audiences. Homeowners insurance is bought via a regular property and casualty insurance agency, while mortgage insurance is typically issued by a lender at the stage of loan origination. This clearly shows the difference between mortgage insurance and homeowners insurance.

Am I Going To Be Paying For These Two Kinds Of Insurance Forever?

While homeowners insurance will be your lifelong commitment as a homeowner, mortgage insurance will last until you pay off your loan for eighty percent of the total appraisal price of your property. In this case, we will contact your lender and exclude the payment on your private mortgage insurance forever.

Who Will Pay For Mortgage Insurance Premiums?

Most likely, we are going to arrange an escrow account for you. Afterward, you will be making just one monthly payment to your loan servicer, who will distribute its part between your homeowners insurance company and mortgage insurance policy.

How to Make Sure Your Investment Is Protected

Understanding the tools that are designed to secure your investment is always important. Mortgage insurance helps you obtain a house sooner at the cost of decreased risks for the lender. However, homeowners insurance helps protect your personal finances from any unforeseen circumstances.

Is mortgage insurance and homeowners insurance the same? Knowing the main difference between these two policies will help you make wise decisions about your spending on housing and insurance fees. If you are about to buy a new home, or simply wish to thoroughly study your current loan structure, feel free to contact our team at BrickWood Mortgage.

Paul Hankins

Paul Hankins, founder of Brickwood Mortgage, is a South Carolina native, entrepreneur, and seasoned mortgage professional with more than 23 years of experience in residential lending, real estate investment, property management, and renovation projects in South Carolina.