Is mortgage insurance the same as homeowners insurance? And if so, how much is homeowners insurance? Do both kinds of insurance to cover the same things? Let’s find out!
When shopping for mortgage insurance rates, many homeowners have become confused between homeowners insurance and mortgage loan insurance.
- 1 Homeowners insurance covers your home and property against damage
- 1.1 Homeowners insurance is required by law in every state as a condition of obtaining a mortgage
- 1.2 Mortgage insurance is usually required only when you take out a second mortgage on your house
- 1.3 Private mortgage insurance (pmi) is also mandated by the federal government
Homeowners insurance covers your home and property against damage
And it may also cover other legal costs should you be sued and medical bills if a visitor is hurt inside your house. Home insurance also indirectly assists your lender by shielding your home from potential foreclosure. If you fail to pay your mortgage, your lender may take legal action to foreclose on your property. Foreclosures can be extremely expensive and a lender is usually forced to foreclose on a home when there is no hope of recovering the cost from a borrower who refuses to cooperate with the process. Foreclosures can have a negative impact on your credit history and reduce your ability to get credit in the future.
Homeowners insurance is required by law in every state as a condition of obtaining a mortgage
The states also generally have regulations that govern what coverage is provided and how the premiums may be structured. Your lender will probably require you to purchase homeowners insurance to satisfy the terms of your contract; however, you are not required to purchase additional coverage through the contract.
Mortgage insurance is usually required only when you take out a second mortgage on your house
Home loans are inherently riskier, since the value of the house itself is less than the value of the loan amount. To protect the lender in this situation, the federal government mandates mortgage insurance. The insurance pays a percentage of your potential loss, which is the difference between the value of the house and the loan amount. If the house loses more than its value, the lender has to absorb the loss. This amount is determined by the formula used by the government to compute loan-to-value ratios.
Private mortgage insurance (pmi) is also mandated by the federal government
Private mortgage insurance (pmi) differs from homeowners insurance in that the policy is usually more expensive and does not cover catastrophes that occur on your property. Private mortgage insurance (pmi) is meant to protect the lender’s investment. A private mortgage insurance policy typically covers property damage due to fire, storm, or theft up to the loss value of the property. Private mortgage insurance (pmi) is usually purchased by the borrower’s insurance company or agent. When you purchase homeowner’s insurance, the insurance company typically sells homeowner’s insurance to the lender at a discount.
Stopping paying mortgage insurance protects the lender
Mortgage lenders are well aware that their interests are best protected by stopping homeowners from defaulting on mortgages. The federal Truth in Lending Act requires mortgage lenders to provide reasonable notice of their intent to charge a specified amount for a certain type of foreclosure protection. If the borrower fails to pay the payment, the lender must cease foreclosure on the property immediately.
Most private mortgage insurance plans provide flexibility for borrowers
Many homeowners fall into this category, especially after an unexpected layoff. Private mortgage insurance allows borrowers to shift funds from other sources to secure the payment of their private mortgage insurance plan.
This allows the homeowner to continue making regular monthly mortgage payments even while receiving unemployment or other income-related benefits. Private mortgage insurance is very similar to a home loan protection.