Mortgage insurance vs. homeowners insurance

Quick insights

• Private mortgage insurance (PMI) may be required when a buyer puts less than a 20% down payment on a conventional loan, but this depends on the lender and loan product.
• Homeowners insurance is required by mortgage lenders, a long-term cost that protects your property and varies based on factors like location and coverage.
• Budgeting for both insurances can help you manage overall homeownership expenses effectively.

Buying a home involves more than just the mortgage. Mortgage and homeowners insurance can be additional costs that can impact your budget. Understanding both can help you budget for home expenses.

What is the difference between mortgage insurance and homeowners insurance?

Mortgage insurance and homeowners insurance serve different purposes in the context of homebuying process. Mortgage insurance protects the lender in case the borrower defaults on their loan. Homeowners insurance protects the homeowner from financial loss due to damage or liability related to the property.

What is mortgage insurance?

Mortgage insurance is a type of protection for the lender in case the borrower cannot repay their mortgage loan. On conventional mortgages, this typically means PMI; for government-backed FHA loans, this means mortgage insurance premiums (MIPs). PMI may be referred to as mortgage insurance. The general concept is the same, but the requirement, cost and terms differ.

When is mortgage insurance required?

PMI is usually required when a borrower makes a down payment of less than 20% of the home’s purchase price. This is common for conventional loans with low down payments, when PMI would be required. On FHA loans, upfront and annual MIPs are required.

What is homeowners insurance?

Homeowners insurance is a policy that provides coverage for damage to your home and personal belongings caused by events like fire, theft or natural disasters. It may also include liability protection if someone is injured on your property. You can shop for policies and coverage terms before agreeing to a policy for your home.

Although coverage varies by company and policy, standard homeowners insurance usually provides the following:

• Dwelling coverage: Protects the structure of your home including walls, roof and built-in appliances, against covered perils.
• Other structures coverage: Covers detached structures on your property such as fences, sheds or garages.
• Personal property coverage: Protects your personal belongings, such as furniture, clothing and electronics, from covered perils like theft or fire.
• Liability coverage: Provides protection if you are found legally responsible for injuries or property damage to others.
• Loss of use (additional living expenses): Covers temporary living expenses if your home becomes uninhabitable due to a covered event.
• Medical payments coverage: Pays for medical expenses if a guest is injured on your property, regardless of fault.

When is homeowners insurance required?

Homeowners insurance is always required by the lender as a condition of approving a mortgage loan. The policy ensures that the property, the lender’s collateral, is protected against damage or loss. That could be caused by events like fire, storms or theft, for example.

What is PMI?

Private mortgage insurance (PMI) is a type of mortgage insurance required for conventional loans, typically when a borrower makes a down payment of less than 20%. The borrower could pay PMI premiums as part of their monthly mortgage payment. As a form of mortgage insurance, it protects the lender by covering a portion of the loan if the borrower defaults.

How can I avoid PMI?

To avoid PMI, you can make a down payment of at least 20% of the home’s purchase price. Other options might include choosing a lender that offers mortgages without requiring PMI, using a piggyback loan (such as an 80-10-10 loan), or potentially negotiating with the lender for alternative loan structures.

A piggyback loan is a strategy used to avoid paying PMI by taking out a second loan to cover part of the down payment. This approach reduces the primary loan amount to less than 80% of the home’s value, eliminating the need for PMI.

An 80-10-10 loan is a common type of piggyback loan. It usually works like this:

• 80%: The primary mortgage covers 80% of the home’s purchase price.
• 10%: A second loan (often a home equity loan or line of credit) covers 10%.
• 10%: The borrower pays a 10% down payment.

Chase does not offer piggyback loans.

How long do I have to pay for PMI?

You must pay PMI until you reach at least 20% equity in your home, which usually happens when your loan-to-value (LTV) ratio drops to 80%. Here are some instances when you can get PMI removed:

• You reach 20% equity: Request PMI cancellation in writing when your LTV is 80%.
• Home value increases: Use an appraisal to prove your LTV has reached 80%.
• Loan balance reaches 78% of the original home value: Lender cancels PMI automatically.
• You refinance your loan: Refinance into a loan with at least 20% equity.
• You pay off the loan early: Early payments can help you reach 20% equity faster.

Costs of mortgage insurance and homeowners insurance

Mortgage and homeowners insurance can add to the overall costs of owning a home. The cost of mortgage insurance is determined mostly by your lender and may be removable once you build enough equity. Terms vary by lender and loan type. Homeowners insurance, on the other hand, is a long-term cost that varies based on factors such as the location of the home, its value and the coverage you choose.

In summary

Mortgage insurance and homeowners insurance are both important but serve different purposes and cost different amounts. Mortgage insurance is often required for borrowers putting less than 20% down. The premiums add to monthly payments but may be removable once enough equity is built. Homeowners insurance, typically required by lenders regardless of down payment, is more of a long-term cost to protect against property damage and liability.

Homebuyers may want to take a proactive approach by budgeting for both insurances to manage overall homeownership expenses effectively.