Homeowner AND mortgage insurance?! What’s the difference and why are you paying for both? To put it in layman’s terms, one protects the house and the other protects the mortgage. Read on for mortgage insurance and homeowners insurance explained:
What is mortgage insurance?
Mortgage insurance is a small percentage added to your monthly payment for protection in case the homeowner defaults on the loan. Not to over complicate mortgage insurance, but there are two types. (Don’t worry, you will either have one or the other, not both.) The type of mortgage insurance you pay per month depends on your home loan. Find your scenario below to find out which type of mortgage insurance you are paying:
Type 1. Do you have a conventional loan and put less than 20% down?
If you answered yes to the above question, you are paying private mortgage insurance (PMI).
Your private mortgage insurance (PMI) premium is already calculated in your monthly payment, so do not worry about receiving a bill for it. PMI is required when a borrower has a conventional loan and puts less than 20% down The PMI generally costs between 0.3-1.0% per year of the total loan amount. For reference only, here is an example of a $200,000 loan amount and assuming a .5% PMI rate:
$200,000 (loan amount) x .5% (PMI rate/year) = $1,000 per year
$83.33 is added to your monthly mortgage payment for PMI
NOTE: The PMI will drop off once the loan value hits 78%. You get closer to hitting that amount with every monthly payment you make. Contact your mortgage consultant to find the PMI rate and monthly payment specific to your loan.
Type 2. Do you have an FHA loan?
If you answered yes to the above question, you are paying a mortgage insurance premium (MIP).
A MIP also works very similar to private mortgage insurance (described above). Your MIP is also calculated in your monthly mortgage payment but has a few key differences: MIP is only used with government-backed mortgage loans, such as FHA, and ALL borrowers using this loan product will pay a MIP–regardless of how much they put down.
NOTE: Unlike private mortgage insurance, the MIP does not drop off. The homeowner pays a MIP throughout the life of the loan.
Looking to avoid PMI or MIP? Contact us about a few possibilities:
- Refinance – change from an FHA loan to another loan type, such as conventional
- Split Edge – part of the mortgage insurance is paid up front, while the rest is added to the monthly payment
- Lender Paid – the lender pays the mortgage insurance up front, but the rate is slightly higher
- 2nd Lien – using a home equity loan or home equity line of credit (HELOC) to qualify for a mortgage without paying for PMI
What is homeowners insurance?
Also known as home insurance, this is completely different from mortgage insurance explained above. Homeowners insurance is used to protect the homeowner and the home from any disasters or major damages beyond their control. For example, if your house burns to the ground during a wildfire, the insurance company protects you from losing your home and belongings and/or may help pay for any personal injury. You choose your insurance provider and type of coverage you want to have.
If you already have a policy with an insurance company, like State Farm or Progressive, your premium will vary depending on your policy and what it covers. View the 5 common types of homeowners insurance policies as described by Esurance:
1. Basic Form
This coverage type protects your home and belongings (depending on your policy) from these incidents/disasters:
- Fire or smoke
- Hail & windstorms
- Volcanic eruption
- Damage from vehicles
- Damage from aircrafts
- Riots and civil commotion
2. Broad Form
This policy protects your home, belongings, and in some cases, your personal liability. This policy will cover the 10 incidents listed in basic coverage plus much more:
- Falling objects
- Weight of ice, snow, or sleet
- Freezing of household systems like AC or heating
- Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
- Accidental discharge or overflow of water or steam
- Sudden and accidental damage from artificially generated electrical current
3. Special Form
This form of coverage is among the most common and offers the most protection from the disasters listed above. Special form coverage also protects your home, attached structures like structures, and your belongings. However, earthquakes and floods are generally excluded on most policies.
4. Comprehensive Form
This is the highest amount of homeowners insurance you can obtain. This type is what is called an open-peril policy that provides protection against all of the disasters above plus you choose the amount of protection you want for your personal liability.
5. Condo Form
This type of policy is for condo owners and protects belongings and personal liability. Since it is for condo owners, the coverage typically extends to the floors, walls, and ceiling of the unit as well.