Mortgage Insurance VS Homeowners Insurance: Here’s what first-time home buyers need to know
For first-time homebuyers, the terms “mortgage insurance” and “homeowners insurance” can get confusing. Let’s break down what these terms mean and what you need to know about the different types of insurance when buying a home.
Key Takeaways:
What is mortgage insurance?
How much does mortgage insurance cost?
What’s the difference between MI, PMI, MIP, and UFMIP?
How can I eliminate mortgage insurance fees in the future?
What do I need to know about homeowners insurance?
What’s the difference between liability coverage vs. hazard insurance?
Tips for shopping around for homeowners insurance policies.
What is Mortgage Insurance?
If you buy a home with less than a 20% down payment, you’ll likely have mortgage insurance fees as part of your monthly mortgage bill. Mortgage insurance reduces risks for lenders and protects them if a homeowner defaults on their loan. This allows lenders to approve home loans without requiring a 20% down payment. Think of mortgage insurance as a workaround to get into a home without putting 20% down.
How Much Does Mortgage Insurance Cost?
Your lender will disclose mortgage insurance fees before you commit to a mortgage and close on a home. The monthly mortgage insurance fee can vary based on factors like loan amount, mortgage type, down payment amount, credit score, interest rate, and loan terms.
For a conventional loan, private mortgage insurance (PMI) costs range from 0.5% to 1.5% of the loan amount per year.
For an FHA loan, the annual mortgage insurance premium (MIP) ranges from 0.50% to .55% of the loan amount, divided into monthly payments.
What’s the Difference Between MI, PMI, MIP, and UFMIP?
MI (Mortgage Insurance): General term for mortgage insurance.
PMI (Private Mortgage Insurance): Specific to conventional loans with less than a 20% down payment.
MIP (Mortgage Insurance Premium): Specific to FHA loans, including a monthly fee and an upfront mortgage insurance premium (UFMIP), which is a one-time fee at closing (1.75% of the loan amount).
How Can I Get Rid of Mortgage Insurance Fees in the Future?
If you have a conventional loan, you can request to have your PMI removed once you reach a Loan-To-Value (LTV) ratio of 80% (having paid off 20% of your loan). At 78% LTV, PMI should be removed automatically. For FHA loans, MIP generally remains for the life of the loan unless you refinance into a different loan product. Guidelines change, so consult a mortgage advisor for the most updated information.
What Do I Need to Know About Homeowners Insurance?
To buy a home, you’ll need homeowners insurance, which is separate from mortgage insurance. Homeowners insurance reduces risk for the homeowner and covers liabilities (e.g., someone getting injured on your property) and hazards (e.g., damage from fire, wind, hail, burglary).
Homeowners Insurance: Liability Coverage & Hazard Insurance Policies
Homeowners insurance includes personal liability coverage and hazard insurance. Hazard insurance covers damage from fire, hail, lightning, wind, falling objects, or burglary. Depending on your location, you may need additional insurance like flood or earthquake coverage.
Tips for Shopping Around for Homeowners Insurance Policies
Bundle auto and home insurance to save money.
Read each policy in detail to understand what is and isn’t covered.
Learn about local hazards in your new neighborhood.
Talk to neighbors for insights on local risks.
Do your research to find the best coverage for your needs.
Summary: Mortgage Insurance & Homeowners Insurance
Mortgage Insurance: Protects lenders and allows homebuyers to get a loan without a 20% down payment. Includes MI, PMI, MIP, and UFMIP.
Eliminating Mortgage Insurance: Pay off 20% of your loan or refinance an FHA loan to a different product.
Homeowners Insurance: Covers liabilities and hazards, varies by location. Research policies to understand coverage details.
