Homeowners Insurance Vs. Mortgage Insurance

Monopoly homes with insurance.

Homeowner's insurance is a type of policy bought by a homeowner to cover damages to the home. Mortgage insurance is a type of policy paid for by the homeowner to protect the lender in the event of the homeowner's default.

Significance

A borrower gets no benefit from mortgage insurance--the only party who stands to benefit in the event of a claim is the lender on the mortgage. The borrower is the only one, however, who can benefit from homeowner's insurance claims.

Function

Homeowner's insurance protects the borrower's investment, while mortgage insurance protects the lender's investment.

Time Frame

Most lenders only require borrowers to have mortgage insurance (or PMI) on the home until the borrower has at least 20 percent equity in the home. However, the lender will require the borrower to maintain homeowner's insurance throughout the life of the loan.

Considerations

Mortgage insurance is only required if the borrower has less than 20 percent equity in the home, so to avoid the fee the borrower needs to have a down payment of at least 20 percent at the time of purchase.

Misconceptions

The borrower gets zero benefit from the purchase of mortgage insurance, or PMI. It is simply another monthly fee added onto the monthly payment that goes directly to the lender.

References

• BankRate.com: Low Credit Scores Mean High PMI Rates
• FHA-Home-Loans.com: Glossary of Real Estate and Mortgage Terms
• FinWeb.com: What Does Homeowner's Insurance Cover?