What is the Difference Between Mortgage and Homeowners’ Insurance?
Buying a home usually involves buying insurance, too. There are two types of insurance that most buyers have to deal with: mortgage and homeowners’ insurance. They are not the same thing. Furthermore, whether or not they are required depends on how a home is purchased.
The two biggest differences between mortgage and homeowners’ insurance is what they cover and who they protect. Having to pay on both types of policies can significantly increase monthly mortgage payments, effectively reducing the amount that goes to paying down the principle.
Basics of Mortgage Insurance
Mortgage insurance is an insurance product designed to protect the mortgage lender. What does it cover? It covers borrower default. In other words, mortgage insurance protects the lender against significant financial loss in the event that you cannot make your monthly payments.
Failing to make those payments will eventually land your mortgage in a state of default. The bank can then repossess the home and sell it. Whatever revenue the sale generates goes to the bank to repay what you owe. If sale proceeds come up short, mortgage insurance pays the difference.
In most cases, lenders require mortgage insurance unless and until a homeowner reaches 20% equity. There are limited cases when a lender might require a higher equity value. Either way, mortgage insurance is required whenever lenders believe their risk warrants it.
Estimating Monthly Payments
These days, it is fairly common for real estate brokers and agents to consider mortgage insurance when estimating monthly payments for clients. In addition, most real estate websites include mortgage insurance payments in their estimates. It is standard fare because so many lenders require it.
Salt Lake City’s CityHome Collective advises being prepared to talk about mortgage insurance if you do not have at least 20% for a down payment. Your lender will almost certainly require insurance until you reach 20% equity. Also know that having to carry it will affect how much home you can afford. The more expensive the home, the more costly its mortgage insurance will be.
Basics of Homeowners’ Insurance
A homeowners’ policy is designed to protect the homeowner against financial loss in the event of fire, theft, natural disasters, etc. Homeowners’ insurance indirectly protects lenders as well, ensuring that money will be there to repair or replace a damaged home. Note that lenders almost always require proof of homeowners’ insurance before they will fund a mortgage.
Buyers should understand that homeowners’ insurance is a complex thing. There are different levels of coverage offering protection for different types of losses. There is also the question of insuring against market value or replacement cost.
Other Types of Insurance
Mortgage insurance protects the lender against borrower default. Homeowners’ insurance protects the homeowner against losses incurred by theft or damage. But that’s not all there is. There are other types of insurance products designed to protect buyers:
- Flood Insurance – Homeowners’ policies rarely offer flood protection. Therefore, buyers looking to buy in flood-prone areas are wise to purchase a separate flood policy.
- Liability Insurance – Some homeowners’ policies cover liability claims made by injured guests. But not all do. Liability insurance is available for property owners who do not get coverage through their homeowners’ policies.
- Umbrella Insurance – Umbrella insurance is just as its name implies: an umbrella policy that covers everything not covered by a property owner’s other policies.
Buying a home involves a number of different insurance policies. Mortgage and homeowners’ insurance are just two of them. Be sure to talk them over with your real estate broker if you are new to the home buying thing.