You've just bought a home and you're on the phone with your insurance agent, trying to figure out what kind of policy is right for you. The agent asks if you want homeowners insurance or private mortgage insurance. You have no idea what the difference is, so you ask. Homeowners insurance protects your home from damages caused by events like fire, theft, or vandalism. It also covers your personal belongings. Private mortgage insurance, on the other hand, protects the lender in case you default on your loan. Now that you know the difference, you can make an informed decision about which one is right for you.
What is homeowners insurance?
Homeowners insurance is a type of insurance that helps protect your home and belongings from damage or loss. It typically covers things like fire, wind damage, theft, and other types of disasters. Private mortgage insurance (PMI) is a type of insurance that helps protect lenders in case you default on your mortgage.
What is private mortgage insurance?
When you take out a mortgage to buy a home, your lender will require you to purchase private mortgage insurance (PMI) if you make a down payment of less than 20 percent of the home's value. PMI protects the lender if you default on your loan and the property is sold for less than the outstanding balance of the loan.
The cost of PMI varies, depending on the size of your down payment and loan amount, but it can range from 0.3 percent to 1.5 percent of your loan amount annually. For example, on a $200,000 loan with a 10 percent down payment, you would pay $1,500 per year – or $125 per month – for PMI coverage.
You can usually cancel PMI when you reach 22 percent equity in your home by refinancing or making extra payments on your principal balance. However, some lenders require that you carry PMI for the life of the loan.
How do they differ?
For starters, homeowners insurance covers your home and belongings in the event of a covered loss, while private mortgage insurance (PMI) protects your lender if you default on your loan. Homeowners insurance typically includes coverage for your dwelling and other structures on your property, like a detached garage, as well as personal property like furniture and electronics. It also may provide liability protection if someone is injured on your property or if you accidentally injure someone.
PMI, on the other hand, is insurance that lenders require when borrowers pay less than 20 percent down on their home purchase. It protects the lender—not the borrower—if the borrower defaults on the loan. Once you've built up enough equity in your home (typically 20 percent), you can cancel PMI.
Which one do you need?
There are two types of mortgage insurance- private mortgage insurance (PMI) and homeowners insurance. Both are important, but which one you need depends on your situation.
Homeowners insurance protects your home and belongings from damage or theft. It also covers you in case someone is injured on your property. Private mortgage insurance, on the other hand, protects the lender in case you default on your loan.
If you have a conventional loan, you'll likely be required to have PMI if you put less than 20% down on your home. The good news is that once you've built up enough equity in your home (typically 20%), you can cancel PMI.
If you have an FHA loan, you'll be required to have both homeowners insurance and PMI. However, unlike with a conventional loan, you can't cancel FHA mortgage insurance. You'll pay it for the life of the loan unless you refinance into a conventional loan.
So, which one do you need? If you have a conventional loan and put less than 20% down on your home, you'll need PMI. If you have an FHA loan, you'll need both homeowners insurance and PMI.
How much does each one cost?
Homeowners' insurance typically costs between $300 and $1,000 per year, depending on the value of your home and the amount of coverage you need. Private mortgage insurance typically costs between 0.3% and 1.5% of your loan amount each year, depending on the size of your down payment and credit score.
Conclusion
Although homeowners insurance and private mortgage insurance both protect your home, they do so in different ways. Homeowners insurance protects your home from damage, while private mortgage insurance protects your lender in case you default on your loan. It's important to understand the difference between the two so that you can choose the right coverage for your needs...