Purchasing a house means you’re going to have your hands full. You’ve got piles of documents to sign and all your finances need to be in order. It can be confusing, too, when you’re poring over an insurance contract and nothing makes sense because the language seems to require a law degree.
Sorry to say, you’ve got to understand what your policy is saying because those words are your key to a payout if disaster strikes and you need it. I mean, imagine if you coudln’t understand what your home security app was saying. Home insurance is home security, after all, as we need it to protect us when catastrophe occurs. We shouldn’t be scratching our heads over either.
In this home insurance guide, we’re going to demystify two terms you’re likely to hear kicked around come closing time: homeowners insurance and mortgage insurance. What are they and what are they for? Why do you need them and how much do they cost? For answers to these and other questions, let’s dig in!
Mortgage Insurance vs. Homeowners Insurance: A Quick Breakdown
While both terms have “insurance” in the name, they both serve two entirely different functions. Homeowners insurance protects you and your property, while mortgage insurance protects the lending institution through which you’ve secured your mortgage.
Did You Know: Generally speaking, it takes homeowners about 11 years to get to the point where they no longer have to pay private mortgage insurance. More on that later, though.
Mortgage insurance is essentially an extra amount paid to the bank to protect their financial interests should you fall behind on your payments. There are a handful of different types of mortgages, though, and how and what you’ll pay can change, depending on which type you’ve secured.1 We’ll break that down next.
Different Types of Mortgages and Mortgage Insurance
The most common way folks secure mortgages is through what’s called a conventional loan. When you take out a conventional loan, your lender might arrange for mortgage insurance through a private company. This will commonly be referred to as PMI, or private mortgage insurance. Your rate will depend on your credit score and the amount of your loan, and in some instances, PMI can be canceled. Most lenders, however, will not require PMI on a loan where the borrower puts down 20 percent or more for a down payment.
There are four main types of mortgage insurance for conventional loans. These include:
- Borrower-paid mortgage insurance. This is the most common type of mortgage insurance. It comes in the form of a monthly fee you’ll pay, in addition to your mortgage payment until you have 22 percent equity in your home.
- Single-premium mortgage insurance. This is less common, but still a solid option; it’s when you’ll pay your mortgage insurance in one lump sum instead of monthly payments. The benefit here is that the lump-sum price is often less than the total of paying month to month, but if you refinance, this cannot be refunded.
- Lender-paid mortgage insurance. This is when the lender pays the mortgage insurance, but your interest rates will be a little higher than they would be with a more conventional type of insurance.
- Split-premium mortgage insurance. This is a hybrid plan that combines the first two types of insurance we discussed. You don’t have to pay the full amount as a lump sum, but by paying for a significant portion of it, you’ll lower your monthly premiums.
The above instances refer to when you go through a private lender. When the government is involved, it’s another story. An example of this is another relatively common type of mortgage called an FHA loan. If you secure this Federal Housing Administration loan, your mortgage insurance will be paid directly to the FHA, and the rate won’t be dependent on your credit score. You will pay a fee at closing, and your rate might increase if your down payment is less than five percent.
Another type of mortgage available through the federal government is a U.S. Department of Agriculture (USDA) loan. These are exactly like FHA loans, but they’re typically a little cheaper.
And finally, veterans can secure loans through the Department of Veterans Affairs. Typically called a VA-backed loan, these mortgages don’t include mortgage insurance, as the fee is covered by the VA. You will, however, pay a “funding fee” which depends on your military service, the amount of your down payment, and your disability status.
Did You Know: Veterans and active-service military are preferred targets of identity thieves. If you’ve served and want to protect yourself, head over to our roundup of the best identity theft protection services for military members.
So now that you understand the different types of loans available and how your mortgage insurance will be paid, let’s talk about the actual costs.
How Much Is Mortgage Insurance
We promise we’ll give you a figure, but first, you need to understand that the amount you’re going to pay in mortgage insurance depends on a number of factors. These include:
- Your loan term
- Your interest rate structure
- Your down payment
- The amount of coverage required by the lender
- Your credit score
Also note that we’re talking specifically about mortgage insurance on conventional loans here since federal loans have their own fixed mortgage structures. That said, in general, PMI typically ranges from .55 to 2.25 percent for most borrowers. And again, generally speaking, most homeowners pay between $30 and $70 per $100,000 borrowed.2
It’s also worth repeating that PMI can be canceled once the principal balance of your mortgage falls below 80 percent of the value of your home. It’ll take some time to get there, but once you do, you’ll start seeing some significant savings.
So that’s all there is to know, really, about mortgage insurance. Now let’s turn our attention to the other topic at hand — homeowners insurance.
What Is Homeowners Insurance?
Unlike mortgage insurance, which is in place to protect the financial institution you’re borrowing from, homeowners insurance is in place to protect you and your property. What does it cover exactly? Let’s find out.
Traditional homeowners insurance covers four items, including:
- Your dwelling. This portion of your policy protects you financially if your home is damaged. Once you pay your deductible, the homeowners insurance provider pays for the remainder of whatever repairs are needed. Worth noting, though, that the source of the damage is an important consideration here. If a tree falls through your roof, you’re probably going to be covered. If the creek in your backyard floods your finished basement, not so much. More on that in our homeowners insurance buyers guide.
- Other structures. As the name implies, this portion of your policy will cover the other structures on your property. That includes your detached garage, your tool shed, and your swimming pool. You’ll generally be covered for 10 percent of your total dwelling limit, meaning if your home is protected for $300,000, your other structures will be protected for up to $30,000.
- Personal property. This portion of your policy covers everything inside your home — meaning, all of your stuff. Similar to the other structures’ coverage, this will be a percentage of your total dwelling limit.
- Liability. This protects you if someone is injured on your property and decides to sue you. The amount your provider will pay depends on the elections you make in the purchasing process, but these funds will help cover the injured party’s legal and medical costs.
Pro Tip: Your liability coverage is an important factor protecting you from financial hardship, but sometimes it won’t be enough to cover you completely. You might want to consider additional coverage, which you can read all about in our guide to umbrella insurance.
So, that looks pretty good on paper, right? Well, homeowners insurance isn’t as comprehensive as you think. Let’s take a look at what a traditional policy won’t cover.
What Do Homeowners Insurance Policies Exclude?
Even the most comprehensive home insurance policy will have some notable exclusions — ones you’re going to want to be aware of before they happen to you. It’s likely that homeowners insurance will not cover:
- Flooding. If the tides rise or the levees break, you’re going to need flood insurance.
- Mold and rot. If your floors are sagging due to dampness, you’ll be glad you purchased mold insurance for mold removal and restoration.
- Pests. If your home is damaged from rodents chewing through your wires, you’re not going to be protected by your policy.
- Maintenance issues. Homeowners insurance policies won’t cover damage that’s due to regular wear and tear on your home and its systems.
- Car break-ins. If someone smashes out your windshield to steal your laptop while your car is in the driveway, your homeowners insurance isn’t going to cover it.
Pro Tip: There are several insurance providers that offer both home and auto insurance. If you purchase them together, you’re likely to save money. Check out our top three favorite home and auto bundles for more information.
As a rule of thumb, it’s always a good idea to read your homeowners insurance policy in detail and ask your agent any questions you have so you’re fully aware of what coverages you have.
Now that you’re clear on what your homeowners insurance policy covers or doesn’t cover, let’s talk about the price.
How Much Is Homeowners Insurance?
Similar to mortgage insurance, there’s no clear-cut answer to this. Your homeowners insurance premium will depend on a variety of factors including where you live, the value of your property, how comprehensive your coverage is, and a number of other elements.
However — depending on who you ask — the average cost of homeowners insurance in America is about $2,000 per year or about $167 per month. Again, this will depend on a long list of factors, so your mileage might vary. If you’re looking to save on homeowners insurance, though, you might want to check out our list of the top affordable home insurance providers. These companies offer great coverages that won’t break the bank.
By now you should have a pretty good idea about the differences between mortgage and homeowners insurance, so let’s put a bow on this.
Final Thoughts on Mortgage Insurance and Homeowners Insurance
As you can see, mortgage insurance and homeowners insurance are only similar in the sense that they both have “insurance” in the name. Mortgage insurance protects your lender, and homeowners insurance protects your property. You’ll likely need both, but they serve completely different functions.
While you’re likely going to be pretty limited in your ability to select your mortgage insurance, you have a lot more options with homeowners insurance. Head over to our list of the best home insurance of 2023 to get an idea of what’s available to you.
FAQs for Homeowners Insurance and Mortgage Insurance
Your lender will likely require mortgage insurance on a conventional loan if your down payment is less than 20 percent.
Yes. In order to secure a mortgage, you’ll need to provide proof of coverage. However, if your home is paid off, you’re not required to carry homeowners insurance.
Not particularly. A reasonable plan for a traditional home will likely cost a little more than $100 per month.
Homeowners insurance covers your home, any other structures on your property, your personal belongings, and your liability should someone come on your property and injure themselves.
No. Mortgage insurance protects the lender should you default on your loan.