Buying a home can be financially daunting, particularly for first-time buyers. The array of costs—closing, property taxes, and various insurance types—can make it hard to track where your money is going and why. Among these, homeowners insurance and mortgage insurance are often confused. Despite their similar-sounding names and frequent requirement for home purchases, they serve distinct purposes, protect different entities, and impact your finances differently.
It is crucial to understand the difference between homeowners insurance and mortgage insurance, whether you are currently buying a home, reviewing an existing policy, or planning for future homeownership.
What Is Homeowners Insurance?
Homeowners insurance, sometimes referred to as hazard insurance, is a property insurance policy that protects you—the homeowner—from financial loss due to damage, theft, or liability claims related to your home and belongings. Most lenders require you to purchase a homeowners insurance policy before approving a mortgage, but even if it’s not required, having it is a wise financial decision.
What Homeowners Insurance Covers
A standard homeowners insurance policy typically includes:
- Dwelling Coverage: Protects the structure of your home, including walls, roof, and foundation.
- Other Structures Coverage: Covers detached structures like garages, fences, and sheds.
- Personal Property Coverage: Covers belongings inside the home such as furniture, electronics, clothing, and appliances.
- Liability Protection: Provides legal and financial coverage if someone is injured on your property or if you cause damage to another person’s property.
- Loss of Use Coverage: Pays for temporary living expenses if your home becomes uninhabitable due to a covered event (like a fire or flood).
Optional add-ons can include coverage for earthquakes, floods, sewer backups, or high-value items like art or jewelry.
Who It Protects
Homeowners insurance is designed to protect you, your home, and your belongings. It also protects visitors or others who may suffer harm on your property, as well as adjacent property owners in some scenarios.
When It’s Required
Lenders typically require proof of homeowners insurance before issuing a mortgage. If you fail to maintain coverage, your lender may purchase a policy on your behalf—often at a higher cost and with less favorable terms.
What Is Mortgage Insurance?
Mortgage insurance, on the other hand, is not about protecting you—it protects your lender. It’s designed to minimize the lender’s risk in the event that you default on your loan.
Mortgage insurance comes in different forms depending on the type of loan you have, but the most common is private mortgage insurance (PMI), which is usually required if your down payment is less than 20% of the home’s purchase price.
What Mortgage Insurance Covers
Mortgage insurance doesn’t cover your home or personal belongings. Instead, it provides financial compensation to your lender if you stop making payments on your loan.
Who It Protects
Mortgage insurance protects the lender, not you. While you’re the one paying the premium, the benefit is entirely for the lending institution to reduce their risk of financial loss.
When It’s Required
Here’s when you might be required to carry mortgage insurance:
- Conventional Loans: If your down payment is less than 20%, lenders usually require PMI.
- FHA Loans: Mortgage insurance is mandatory, regardless of down payment size. These loans include both an upfront premium and ongoing monthly payments.
- VA and USDA Loans: These do not require traditional mortgage insurance, but they may include other funding fees or guarantee fees that function similarly.
Key Differences Between Homeowners and Mortgage Insurance
| Feature | Homeowners Insurance | Mortgage Insurance |
| Who It Protects | You (the homeowner) | The lender |
| What It Covers | Property, belongings, liability | Loan repayment in case of borrower default |
| When It’s Required | Usually required for a mortgage | Required with low down payment or certain loans |
| Cost | Varies based on home value, location, etc. | Based on loan type, down payment, credit |
| Cancelable? | N/A (ongoing as long as you own home) | Often cancelable when equity reaches 20–22% |
Understanding these distinctions is vital because it impacts both your monthly mortgage payment and your financial protection as a homeowner.
How Each Affects Your Monthly Mortgage Payment
Homeowners Insurance
Homeowners insurance is typically included in your monthly mortgage payment as part of your escrow account. Your lender collects an estimated annual amount each month, which is then used to pay your policy on your behalf. Even if your home is paid off, you should still maintain coverage—but at that point, it would no longer be part of your mortgage payment.
Mortgage Insurance
Mortgage insurance is also added to your monthly mortgage payment, but again, it provides no benefit to you. For PMI, it usually ranges between 0.3% to 1.5% of the original loan amount per year, depending on your credit score and down payment.
This additional cost can make a noticeable difference in your monthly expenses, and many homebuyers aim to eliminate PMI as quickly as possible.
How to Remove or Avoid Mortgage Insurance
One of the biggest frustrations with mortgage insurance is paying for something that doesn’t benefit you directly. The good news is that, in many cases, it’s not permanent.
For Conventional Loans:
- You can request PMI cancellation once you’ve reached 20% equity in your home.
- PMI is automatically removed when your equity reaches 22%, based on the original loan value.
- You can also refinance to a new loan without PMI if your home has appreciated significantly.
For FHA Loans:
- If your FHA loan originated after June 3, 2013, and you put down less than 10%, you’re required to pay mortgage insurance premiums (MIP) for the life of the loan.
- To remove it, you’ll need to refinance into a conventional loan once you qualify.
How to Avoid It Altogether:
- Make a 20% or higher down payment.
- Consider lender-paid mortgage insurance, though it usually comes with a higher interest rate.
- Choose loan types that do not require traditional mortgage insurance, such as VA loans if you’re a veteran.
Can You Shop Around for Better Rates?
Homeowners Insurance
Absolutely. In fact, it’s recommended. Insurance companies vary widely in coverage, customer service, and pricing. You can shop policies just like you would for car insurance. Bundling with auto insurance or increasing your deductible can often lead to savings.
Mortgage Insurance
Unfortunately, you cannot shop for traditional PMI providers. The lender selects the mortgage insurance provider. Your best leverage is in negotiating the terms of the loan itself—better credit, a larger down payment, or a different loan structure.
What Happens If You Don’t Have It?
No Homeowners Insurance:
If you cancel or forget to renew your policy, your lender may force-place insurance on your property. This type of coverage is much more expensive and protects only the lender’s interest—not your personal property or liability.
No Mortgage Insurance (When Required):
If you try to bypass mortgage insurance when it’s required, your loan won’t close. In some cases, lenders offer options like “piggyback loans” to structure the deal differently, but they often involve additional complexity or higher rates.
Long-Term Implications for Homeowners
Building Equity:
Mortgage insurance can delay your ability to build equity quickly because more of your monthly payment goes to fees rather than principal. Removing PMI sooner frees up cash flow for additional principal payments or other financial goals.
Risk Management:
Homeowners insurance offers long-term security. A single incident like a fire or storm could result in hundreds of thousands of dollars in damage. Without coverage, you would be financially responsible for repairs or rebuilding.
Refinancing and Flexibility:
The more you understand your insurance costs upfront, the better you can plan for refinancing, selling, or converting your home into a rental property in the future.
Which One Should You Prioritize?
The reality is, you don’t get to choose between homeowners insurance and mortgage insurance—in most cases, both are required. However, understanding their differences helps you make smarter decisions when comparing mortgage options and insurance policies.
- If your goal is to protect your financial investment, homeowners insurance is non-negotiable.
- If your goal is to reduce monthly costs, consider strategies to avoid or remove mortgage insurance quickly.
Ultimately, homeowners insurance is a safeguard for your assets and well-being, while mortgage insurance is a temporary cost for access to financing. Knowing how both work—and how to manage them—can make a significant difference in your long-term financial outlook as a homeowner.
