You don’t need to be an insurance expert when you’re shopping for your first home, but it can be challenging when you come across the terms “home insurance” and “mortgage insurance” for the first time. As you learn about your insurance needs at this important new milestone in your life, it may help to know that there is a difference between home insurance and mortgage insurance. Depending on many factors, not all homeowners need mortgage insurance, but to make sure your new home is sufficiently protected, homeowners insurance is often a necessity.
As you start looking for a home and navigate the home loan pre-qualification process, here’s a look at each type of insurance, why you’d need it, what it can help cover, and when you might be able to buy it.
what is mortgage insurance?
Mortgage insurance, also known as private mortgage insurance or PMI, is insurance that some lenders may require to protect their interests in the event of a default on your loan. mortgage insurance does not cover the home or protect you as a homebuyer. instead, pmi protects the lender in the event you are unable to make payments.
When is mortgage insurance required?
Usually, you may be required to have mortgage insurance when you take out a home loan and your down payment is less than 20 percent of the purchase amount. The requirement to have mortgage insurance varies by lender and loan product. However, depending on your circumstances, some lenders may allow you to waive PMI even if you make a smaller down payment. Consider asking your lender if pmi is required, and if so, if there are any exceptions to its requirement that you may qualify for.
Is mortgage insurance included in your mortgage?
Mortgage insurance is not included in your mortgage loan. it is an insurance policy and separate from your mortgage. There are generally two ways you can pay for your mortgage insurance: in a lump sum up front or with monthly payments over time. That said, it’s not uncommon for the monthly cost of the PMI premium to be included with the monthly mortgage payment. this way you can make a monthly payment to cover both your mortgage loan and your mortgage insurance.
If you want to know if a lender requires mortgage insurance, how you pay for it, and how much it will cost, see the loan estimate1 you get from a lender for details and to ask questions. You can also do your own research by visiting an online resource such as the Consumer Financial Protection Bureau. You’ll want to look for information that explains the closing disclosures in your loan calculation to better understand what pmi may be required and whether you’d pay premiums monthly, up front, or both.
The good news is that if you need mortgage insurance, you may be able to cancel PMI after making enough payments on your loan to reach more than 20 percent of the equity in your home. check with your lender to find out when and how you can get out of pmi2 when you are no longer required to have pmi.
what is homeowners insurance?
Homeowners insurance, also known as home insurance, is coverage required by all mortgage lenders for all borrowers. Unlike the requirement to purchase PMI, the requirement to purchase homeowners insurance is not related to the amount of down payment you make on your home. it is tied to the value of your home and property.
When is homeowners insurance required?
Homeowners insurance is generally required for anyone who obtains a mortgage loan to purchase a home. After you pay off your mortgage, you’ll probably want to continue to carry a homeowner’s insurance policy. While your mortgage lender can no longer require you to carry home insurance after you pay off your mortgage, it’s up to you to protect your investment.
Is homeowners insurance included in your mortgage?
Some homeowners may think their homeowners insurance is included in their mortgage because they make a single monthly payment that covers both the homeowners insurance premium and the monthly mortgage payment. however, homeowners insurance is not included in your mortgage. it is a separate insurance policy from your mortgage loan contract. Even when your loan and insurance costs are bundled into one monthly payment, your homeowners insurance premium goes to your homeowners insurance company and your mortgage payment is received by your mortgage lender.
Your mortgage lender can set up an escrow account3 from which to pay property insurance and property taxes. this helps ensure you have enough money to pay both important expenses on time. The bank typically collects that money as part of your monthly mortgage payment, escrows the funds, and then makes a payment to your homeowners insurance company on your behalf every six months or every year.
Do I need homeowners insurance after I pay off my mortgage?
You need property and homeowners liability insurance even after your mortgage is paid off if you want protection for your home. Homeowners property coverage can help protect against the potentially devastating costs of rebuilding or replacing your property after damaging events like fires, lightning strikes and windstorms. Homeowners liability insurance can help protect you if a guest falls into your home and is injured.
Unlike pmi, homeowners insurance is not related to your mortgage except that mortgage lenders require it to protect their interest in the home.
While mortgage insurance protects the lender, homeowners insurance protects your home, the contents of your home, and you as the owner. once your mortgage is paid off, you have 100 percent equity in your home, so homeowners insurance can become even more crucial to your financial well-being.
Here are four reasons why you need homeowners insurance after you pay off your mortgage:
- Homeowners insurance covers the structure of your home. Your homeowners insurance can help pay to repair or rebuild your home after a disaster or covered event, like a break-in dwelling, a thunderstorm, a house fire, a tornado, or a hurricane. Most policies also cover freestanding structures on the property, such as a storage shed, gazebo, or guest house. If you don’t have homeowners insurance and your home is damaged or destroyed, you will be responsible for the costs of repair, replacement, and reconstruction.
- Homeowners insurance protects your belongings. Remember, it’s not just the structure of your home that needs to be covered. Your home is full of possessions that could be expensive to replace, including furniture, clothing, sports equipment, and tools. Your homeowners insurance may also cover items outside of your home, like your cell phone or a newly purchased Christmas present that is stolen in a carjacking. homeowners insurance can even cover the trees and shrubs in your yard.
- Homeowners insurance can help cover your lodging, if your home becomes temporarily uninhabitable. It’s a good idea for your home insurance policy to include coverage for additional living expenses ( hey). This coverage can help pay for an Airbnb, hotel, or other accommodation while your home is uninhabitable due to a covered event. ale can also cover the cost of meals while your home is being rebuilt.
- Homeowners insurance can help protect you from liability claims. An important and often overlooked part of homeowners insurance is liability coverage. You may need protection in the event a guest or visitor is injured on your property. for example, a neighbor might slip on some ice on their walkway. Liability coverage can help pay for medical bills and possibly even cover your attorney’s fees when someone files a liability claim against you.
As you can see, both mortgage insurance and homeowners insurance play an important role in home ownership. Ready to learn more about Travelers Homeowners Insurance? contact your agent. don’t you have one? find an agent now.