Mortgage Insurance vs. Homeowners Insurance

Buying a new home is complicated and stressful: the last thing you want to think about is the various types of insurance and insurance coverage related to homeownership. But it's important to understand the difference between mortgage insurance and home insurance. Depending on the financial details of your home purchase, mortgage insurance — also known as private mortgage insurance, or PMI — may be required and will become a part of your expenses. Your lender or mortgage company may also mandate homeowners insurance, but you shouldn't assume PMI and home insurance are one and the same.

Let's explore the differences, and who and what each type of insurance protects.

What's the difference between mortgage insurance and home insurance? — table of contents:

1. What is mortgage insurance?
2. What is title insurance?
3. How does mortgage insurance differ from home insurance?
4. What is mortgage disability insurance?
5. What to consider
   
   
   

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What is mortgage insurance?

While homeowners insurance protects your property and assets, mortgage insurance is meant to protect the lender. Mortgage insurance is required if you don't make a down payment of at least 20% of the home's value when you purchase the property. In the event you can't make mortgage payments and you default on your loan, it safeguards your mortgage lender from the financial loss of the home loan. In no way does it benefit or protect the homeowner or their assets — though the homeowner is responsible for paying for PMI, it only protects the lender if monthly mortgage payments are missed.

 

What is title insurance?

When you buy a home, a title company must ensure the title is "clean" — that is, checking to see there are no outstanding claims or liens on the property. Title insurance protects owners and lenders against financial loss arising from defects in title documentation, unsettled lawsuits or liens, and issues of fraud or forgery in the home's ownership records. While most insurance types protect against hazards that may occur in the future, title insurance safeguards against potential discrepancies during the title transfer process that may have occurred in the past. One of the most common title insurance claims is for missed back taxes.

While title insurance is not required by law when you purchase a home, many lenders will require it as a condition of getting financed.

How does mortgage insurance differ from home insurance?

Homeowners insurance covers the structure of the home, along with personal property and provides liability insurance. It protects your home if it sustains damage as a result of a covered loss, and helps pay to repair the damage or replace the home if it’s a total loss. Read a more in-depth analysis of what homeowners insurance covers.

In no situation does mortgage insurance cover anything to do with your house, your personal property, or liability — unless you cease paying your mortgage.

 

What is mortgage disability insurance?

With typical long-term disability insurance, you're paid out a percentage of your pre-disability income to help cover expenses while you're unable to work. But with mortgage disability insurance, only your mortgage payment (principal and interest) is paid — this is the specific amount of your payment versus a percentage of your income. This coverage is especially valuable for folks working in high-risk industries, or those who don't already have disability insurance. Mortgage disability insurance is often purchased through your mortgage company, but you can also get it as an independent policy from an insurance agent. 

Mortgage disability insurance can also ease stress because the insurer will pay the mortgage company directly so you won't have to deal with moving payments around while you're recovering. There are often riders you can add to the policy, such as home-related expense coverage or return of premium.  

 

Mortgage insurance: what to consider 

Paying for PMI raises the overall cost of homeownership even with it being tax-deductible. Budgeting for mortgage insurance is something to consider before buying a home. PMI generally costs 0.5% to 1% of the total loan amount. This doesn’t sound like much, but let’s put it into context.

If you take out a mortgage loan for $200,000, and your PMI fee is 1%, that’s an additional $2,000 a year (or $166 monthly payment) dedicated to protecting your lender, not your home.

That money could be better spent going toward homeowners insurance, which explicitly protects the homebuyer and their assets. It can cost anywhere between $700 to $1,500 per year depending on a number of factors like where you live, the value of your home, credit score, and the insurance company you have a homeowners policy with. With some financial planning, you can avoid paying PMI, instead putting your money toward a good home insurance policy instead.