Mortgage Insurance vs. Homeowners Insurance: Understanding the Key Differences
When you’re purchasing a new home, you’ll want to understand the differences between various types of insurance policies. Two commonly confused insurance policies are mortgage insurance and homeowners insurance. Both of these insurance types are integral to the home-buying process, yet they serve different purposes. Let’s explore the differences between mortgage insurance and homeowners insurance in this post. If you have any questions, don’t hesitate to contact us.
What is Homeowners Insurance?
Homeowners insurance is a form of property insurance which will cover losses and damages to an individual’s house or assets within the home. Homeowners insurance also provides liability coverage against any accidents which may occur in your home or on your property. It’s essentially a combination of hazard insurance (covering your property from damages) and liability insurance (covering legal liabilities to third parties).
Key Aspects of Homeowners Insurance:
- Coverage: This insurance covers the structure of the home, personal belongings, liability for injuries, and sometimes additional living expenses if your home is damaged and you need to live elsewhere during repairs.
- Purpose: The primary goal is to protect your investment in your home and provide a safety net against the financial impact of unexpected disasters or legal issues.
What is Mortgage Insurance?
Alternatively, mortgage insurance is designed to protect the lender from the associated risks of default by the borrower. It’s most commonly required when homebuyers make a down payment on their home of less than 20% of the home’s purchase price.
Key Aspects of Mortgage Insurance:
- Coverage: Mortgage insurance will not cover physical damage to your home. Instead, it protects your mortgage lender by ensuring your loan will be promptly repaid should you be unable to continue making timely payments.
- Purpose: The purpose of this type of insurance is to enable the borrower to purchase a home without placing a large down payment (20%+), thus expanding the opportunity to own a home to customers who either do not want to pay the larger down payment, or those who cannot afford to pay a 20%+ down payment.
Key Differences
Beneficiary: Homeowners insurance will benefit the homeowners, protecting their home, their personal property, and their investment into their asset. Mortgage insurance benefits the mortgage lender by reducing the overall risk of financial loss should the homeowner stop making payments on their mortgage.
Requirement: Mortgage insurance is generally required for homeowners who have placed less than 20% of a down payment towards the purchase price of their home. Homeowners insurance is required by nearly all mortgage lenders, regardless of the size of the down payment, as it protects through securing the loan.
Cost & Duration: Mortgage insurance can be a temporary cost, yet it’s easily removable once the homeowner has paid down their mortgage enough to gain equity in the home where the mortgage balance falls below 80%. Homeowners insurance is an ongoing expense for as long as you own the home and choose to keep it insured.
Claims: Claims under homeowners insurance are made when there’s damage to the property or its contents, or a liability claim is made against the homeowner. Mortgage insurance claims will be made by the lender to recover any losses from a loan default.
Choose Portsmouth Atlantic Insurance for All of Your Homeowners Insurance Needs
Understanding the distinctions between mortgage insurance and homeowners insurance is essential for any homeowner. While one protects the lender, the other safeguards the homeowner’s financial interests. Ensuring that you are adequately covered under both policies, where applicable, can help secure your investment and provide peace of mind in your new home.
Portsmouth Atlantic Insurance is here to help you navigate the distinct differences between mortgage insurance and homeowners insurance. Both are valuable for different reasons and we want you to be able to secure the right level of coverage for your home at the right price. Ensuring you’re properly protected under both policy types, when applicable, will help you secure your investment and will provide you with one of the best benefits available: peace of mind. Feel free to contact us and we’ll be happy to help. We look forward to hearing from you soon!