Being a homeowner comes with many costs. Some you know are coming like repairs and maintenance. Others are less obvious. One of those is insurance.
If you are going to own a home, you need to have insurance. Most people have simple homeowner’s insurance that covers their dwelling and belongings if something happens. You may never have heard of another kind of insurance called mortgage insurance. This article will discuss the difference between the two.
In the case of financed homes, you would be required to have homeowner’s insurance. Also, you may have to shell out extra money for mortgage insurance, depending on the down payment size.
Often, property owners get confused between private mortgage insurance, homeowners’ insurance, and mortgage protection insurance. At the outset, you need to understand the provisions of each of these types. This will help you save money in the long run in that you won’t be spending money on something you don’t need.
Many companies offer insurance products to meet your needs. These products vary in cost from state to state and country to country. So check in your local area, like if you live near Edmonton, you could head over to Surex for insurance quotes.
Let’s look at home insurance and how it differs from mortgage insurance.
What Is Home Insurance?
Home insurance, also termed homeowner’s insurance, is meant to protect the property owner in case of an incident. Therefore, if the property or its belongings get destroyed by causes such as explosions, vandalism, riots, tornados, or fire, the homeowner can get the damage compensated.
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Standard home insurance plans also provide adequate coverage for external installations like sheds, fences, trees, and shrubs. Within the confines of your home insurance policy, other types of coverage include the following:
1. Liability Insurance
Liability insurance covers property damage or injuries that you might accidentally inflict on others. Additionally, liability insurance would cover the legal expenses if the property owner gets sued over a condition that is not under the policy.
2. Medical Expenses For Others
In case any of your guests get injured during their visit to your property, you can get the expenses of treatment covered under this provision. For instance, someone might slip on wet tiles in your home and fracture a wrist.
3. Loss Of Use
If you cannot reside at your home as a result of some kind of damage covered through the policy, you can get the extra expenses compensated through the loss of use. This includes laundry and hotel bills. This provision is also known as coverage for additional living expenses.
Related Content: What Do I Need to Know About Homeowner’s Insurance?
What is Mortgage Insurance?
At times, creditors require homeowners to purchase mortgage insurance. This policy would secure the lender in case the borrower defaults on the loan. Therefore, the purpose of mortgage insurance is not to provide coverage for your house or the financial interest of the property owner in the house.
For instance, if you happen to damage your furniture, it would not be covered by your mortgage insurance. Your home insurance policy would instead cover this loss. Therefore, the sole purpose of having mortgage insurance is to secure the lender if you fail to pay the mortgage.
Typically, if your down payment is less than 20% of the property value, you would have to purchase mortgage insurance. The reason is, the lender would be at a higher risk if you make a lower down payment.
What are MPI and PMI insurances?
PMI (private mortgage insurance) is slightly different from mortgage insurance or MPI (mortgage protection insurance). This is often optional and would be required to make the mortgage payments if you pass away, become unemployed, or are disabled.
On the other hand, if you make a small down payment, your lender would require you to purchase private mortgage insurance.
Although similar, MPI and PMI secure two different parties. PMI is designed to secure the lender if the buyer fails to make the payment. On the other hand, MPI would ensure your mortgage payments if you run out of luck following accidents or unfavorable incidents.
Things That PMI Covers And Cost
PMI provides coverage to the lender against possible losses in case the homeowner stops paying the mortgage. It is necessary to shell out an amount for the insurance, just like a part of the monthly amount for a mortgage. This ensures that the creditor would be secured even if you fail to make the payment.
The amount you need to pay for private mortgage insurance would vary. This is based on several factors like the value of the mortgage, down payment size, and credit score. As a general rule, you need to pay anything between 0.3% to 1.5% a year on the original amount of the home loan. This amount would be split into monthly installments.
Is It Mandatory To Have Mortgage Insurance?
While home insurance is mandatory, you are not required to go for mortgage insurance. To ditch this expense, make sure to pay at least 20% of the property value as the down payment. This might prompt the lender to waive the mortgage insurance requirement. However, if you do not have adequate funds to manage 20% or more for the down payment, or have a poor credit history, the lender might require you to purchase mortgage insurance.
Moreover, this additional security would be required if you apply for an FHA loan. Naturally, most mortgage companies would want things to be in place when it comes to their repayment.
Conclusion:
While home insurance would protect the borrower, mortgage insurance would cover the lender. In the case of home insurance, you need to shell out the premium to the insurer directly. For mortgage insurance, you may have to pay monthly installments, or a specific part of the closing costs of property purchase to the insurer, as directed by the lender.
So in conclusion, home insurance is a must. Mortgage insurance is not. If you are still in a dilemma, feel free to consult your local professionals. Their guidance can help you make the right decision when it comes to policy purchases.
Leave a Comment or Answer a Question Below: Do you have mortgage insurance? If so, what is the reason behind having it? Have you ever had to make a claim on your homeowner’s insurance policy because something happened?
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