Joe Dyton has been a professional writer since 1999. He's been writing about the auto insurance industry for 15 years and was an in-house marketing copywriter for GEICO for a decade. Learn more about Joe at joedyton.com.
7+ years in business and financial services content
Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.
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You can take a number of measures to protect your home, but purchasing a homeowners insurance policy is perhaps the most important. You might also come across the term mortgage insuranceas you look for a homeowners policy.
These protections may seem interchangeable, but the difference between them is significant. One is designed to protect you and your home, while the other serves your mortgage lender’s best interest.
Keep reading to learn more about mortgage insurance and why you need to care about this speciality coverage.
Key differences between homeowners insurance and mortgage insurance
It’s easy to think of homeowners insurance and mortgage insurance as one and the same, but they’re two different types of insurance.
Homeowners insurance: This protects you (the policyholder) and your property by helping pay for repairs to any structural damage to your home or personal property. It also helps replace stolen valuable assets in the event of a robbery and covers your liability for injuries that happen on your property.
Mortgage insurance: Also known as private mortgage insurance (PMI), this protects your lender’s investment in your mortgage. Mortgage insurance doesn’t cover your property or you. It simply offers your mortgage lender financial protection if you default on your home loan. PMI can help you secure a home loan in cases where you may not be able to otherwise. For example, your lender may require you to carry PMI if your down payment is less than 20% of the total cost of your home.
Here’s a closer look at the key differences between a homeowners insurance and mortgage insurance policy:
Role
▲▼
Homeowners Insurance
▲▼
Mortgage Insurance
▲▼
Requirements
Lenders almost always require borrowers to buy a policy.
Lenders typically require the borrower to purchase a policy if they have a conventional loan and a down payment of less than 20%.
Purpose
Homeowners insurance protects the homeowner and their property in the event of damage, theft, or liability instances, such as injuries that occur in the home or on the property.
Mortgage insurance protects the lender in the event the borrower defaults on their mortgage loan.
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What does homeowners insurance cover?
Typical homeowners insurance policies cover the property’s structure, personal property, additional costs, and living expenses, and they provide liability protection.[1]
Here’s a closer look at each of these homeowners insurance coverages:
Structure
Your homeowners insurance policy would pay to repair or rebuild a home that suffered damage from fire, lightning, hail, or hurricane. Talk with your insurance company about what other disasters your policy covers. Remember that a standard homeowners policy doesn’t cover floods, earthquakes, or natural wear and tear damage.
Liability
This type of insurance coverage protects you after someone injures themselves on your property. It also covers you in a lawsuit if you, a family member, or your pet damaged someone else’s property. Liability coverage pays for your court defense and any awards — up to the limit noted in your policy.
Additional living expenses
This covers costs incurred when you can’t live in your home due to a covered loss, such as fire damage. Hotel rooms and meals are examples of the expenses your policy would cover.
Personal property/belongings
Your insurance company helps pay to replace personal items such as furniture, clothing, and electronics damaged in a covered loss or that someone stole.
Is homeowners insurance required?
Homeowners insurance isn’t required by law. If you borrowed money to purchase your home, your lender will require you to carry homeowners insurance, though.[2] So if your home is paid off, you have no obligation to insure your home.
But it’s still in your best interest to carry homeowners insurance.
Think of the worst-case scenarios. You’d be financially responsible for rebuilding your home if it burned down in a fire and you didn’t have insurance. The same is true if your house was robbed and your valuables were stolen. Without homeowners insurance, you’d have to pay for any replacements yourself instead of your insurer covering the costs.
What is private mortgage insurance (PMI)?
Private mortgage insurance (PMI) is an insurance policy that lenders sometimes require borrowers to purchase. PMI is separate from homeowners insurance, as it doesn’t protect policyholders, their home, or personal belongings. Instead, PMI protects the lender in the event the borrower defaults on their mortgage. Lenders typically require homeowners to purchase PMI if their down payment is less than 20% of the home’s purchase price.[3]
PMI makes the lender the priority, but the good news is it provides benefits to the borrower, too. For example: PMI gives you the chance to buy a home even if you don’t have 20% of the purchase price for a down payment. This allows you to start building equity right away rather than when you have enough for a down payment. And PMI may be tax deductible.
Your PMI premium is paid monthly and typically included in your mortgage payment. The actual PMI cost varies, but mortgage insurance premiums can fall between $30 and $70 monthly for every $100,000 borrowed, according to Freddie Mac.[4] Depending on the terms of your loan, you also have the option to cancel PMI monthly payments after you’ve built 20% equity in your home.
Do you need both homeowners insurance and mortgage insurance?
You don’t need to have both homeowners insurance and mortgage insurance. But your lender may require you to have both insurance products depending on your borrowing situation and other risk factors.
Here’s the scenario when you’d likely need to carry both homeowners insurance and mortgage insurance:
1. You’ve borrowed money to purchase your home. Your lender will require you to have homeowners insurance until you’ve paid your loan in full. Lenders require you to carry a homeowners policy to help protect the collateral on your loan (the house).
And …
2. Your down payment is less than 20% of the home’s purchase price. Lenders want assurance that they can recoup the mortgage even if you default. PMI protects the lender in the event you’re unable to make your monthly mortgage payments.
So, if you borrow money to purchase a home and your down payment is less than 20% of the purchase price, you’ll need both homeowners insurance and mortgage insurance. Be sure to review all your lender’s requirements before entering into an agreement so there are no surprise costs.
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How to decide which insurance you need
Your home is one of the biggest, if not the biggest, purchases you’ll make. That’s why homeowners insurance is so important — even if you think you don’t need it. Even the slightest bit of structural damage could cost thousands of dollars.
Here are some factors to keep in mind during your financial decision-making process as you shop for a policy to protect your home, yourself, and your personal belongings:
The type of home loan you have
Your lender’s requirements
Your home’s value/how much it would cost to rebuild
How much your personal belongs are worth
There’s no need to try to sort all of this out on your own, though. Consult with your lender to get a good understanding of all its requirements. You can then take the requirements and review them with a home insurance agent who can help you get an appropriate amount of coverage for your particular situation.
Mortgage insurance, on the other hand, isn’t something you need but rather something your lender will require if you don’t put enough money down on your home.
Homeowners vs. mortgage insurance FAQs
Determining the difference between homeowners insurance and mortgage insurance can be tricky. Here are answers to some of the most common questions asked about homeowners versus mortgage insurance.
Are mortgage insurance and home insurance the same?
No. Homeowners insurance and mortgage insurance are two different types of insurance. Homeowners insurance protects your property, you, your family, and your personal belongings in the event of property damage, theft, or lawsuits. Meanwhile, mortgage insurance is designed to protect lenders in case you default on your home loan.
Is homeowners insurance included in a mortgage?
No. Homeowners insurance isn’t automatically included in a mortgage. You can include your insurance premium in your mortgage payment if you have an escrow account, though.
When you pay your mortgage, a piece of that payment is placed in your escrow account, and that portion pays your homeowners insurance, property taxes, and PMI if necessary.
Why would you get mortgage insurance?
You would get mortgage insurance if your lender requires you to. This requirement usually occurs if your down payment is less than 20% of the home’s sale price. Your lender will require you to have PMI as protection in case you can’t make your mortgage payments.
Joe Dyton has been a professional writer since 1999. He's been writing about the auto insurance industry for 15 years and was an in-house marketing copywriter for GEICO for a decade. Learn more about Joe at joedyton.com.
7+ years in business and financial services content
Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.
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