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Mortgage Insurance vs. Homeowners Insurance: How They're Different

Homeowners insurance protects you and your home, while mortgage insurance protects lenders from borrower default.

If you have a mortgage like most homebuyers, your lender will likely require you to purchase homeowners insurance. But some homebuyers will be required to purchase another type of insurance: mortgage insurance. Knowing the finer differences can help you better understand your monthly mortgage payments and save you money. This article covers:

What’s the difference between mortgage insurance and homeowners insurance?

There are two important differences between homeowners insurance and mortgage insurance: who they protect and what they protect. Homeowners insurance protects you, your home and your mortgage lender, while mortgage insurance protects only your lender.

Homeowners insurance protects your house and property from damage, and can also cover legal expenses if you are sued and medical expenses if a guest is injured in your home. Home insurance also indirectly benefits your mortgage lender by protecting your home. Your house is the collateral between you and a lender, meaning your lender needs your house to maintain its value and be undamaged.    

Mortgage insurance protects mortgage lenders from borrower default. If a borrower is unable to or doesn’t pay their monthly premium, the lender can incur extra costs. Mortgage insurance can help mitigate the financial loss if a borrower defaults on a loan.

Mortgage insurance vs. home insurance
  Homeowners insurance Mortgage insurance
Covers You, your property and your lender Only your lender
Paid for by The homebuyer The homebuyer
Cost per year $1,215* on average Usually 0.5% to 2% of the loan amount
When is it required? Almost always when a homebuyer takes out a mortgage If you make less than a 20% down payment
Example Your roof is damaged by a windstorm and must be repaired. You default on your home loan, so your lender doesn’t receive payments.
*For up-to-date average home insurance rates, see our average cost of homeowners study.

A similarity between mortgage insurance and homeowners insurance is who foots the bill: the homeowner. So even though mortgage insurance protects only the lender, the borrower pays for it. Mortgage insurance and homeowners insurance are often included in your mortgage payment through escrow.

Homeowners insurance is almost always required for the entire length of a mortgage loan, while mortgage insurance is usually only required if a homebuyer makes less than a 20% down payment. That means you can avoid having to pay mortgage insurance by making a large enough down payment, but probably cannot get out of paying homeowners insurance.

What is mortgage insurance?

Mortgage insurance allows lenders to approve borrowers who might not otherwise qualify for a home loan. Lenders consider buyers who make smaller down payments riskier, and mortgage insurance helps mitigate that risk by protecting the lender from borrower default.

There are a few types of mortgage insurance, which are determined by your type of home loan.

Private mortgage insurance (PMI)

If you have a conventional home loan and your down payment was less than 20%, you’ll probably be required to have private mortgage insurance. There is no upfront cost of PMI, but it typically costs 0.5% to 2% of the loan amount a year. Most homeowners must pay PMI until they’ve built 20% equity in their home.

FHA mortgage insurance premium (MIP)

If you have an FHA home loan, which is guaranteed by the federal government, you are required to have mortgage insurance. There is an upfront cost of 1.75% of your home’s purchase price for FHA mortgage insurance, and then you’ll have to pay a monthly insurance premium (MIP) after that, which ranges from 0.45% to 1.05% of your home loan.

What type of mortgage insurance do I need?
Loan type Down payment Mortgage insurance required? Length
Conventional More than 20% No
Conventional Less than 20% Usually, PMI Until you’ve built 20% equity
FHA More than 10% Yes, FHA mortgage insurance Minimum of 11 years
FHA Less than 10% Yes, FHA mortgage insurance Lifetime of loan*
*This may vary depending on when you received your loan. Additionally, there are other government loan programs, like the VA and USDA loan programs, which may require mortgage insurance, but they are less common loan types.

How to stop paying mortgage insurance

Payment for mortgage insurance is often rolled into your monthly mortgage payment, along with your homeowners insurance. That means if you can get out of paying for mortgage insurance, you can lower your monthly payments.

To stop paying for private mortgage insurance on a conventional loan, you’ll need to build up 20% equity in your home. So if the purchase price of your home was $200,000, you’ll need to have $40,000 or more equity in your home.

If your down payment was 10% or more on an FHA home loan, you need to pay your mortgage insurance premium for a minimum of 11 years. If your down payment was less than 10%, you have to pay your mortgage insurance premium for the lifetime of the loan. Your other alternative is to refinance your FHA loan to a conventional loan once you have built up at least 20% equity in your home.

Because of the requirements of mortgage insurance, it’s not possible for everyone to eliminate that expense from their mortgage payments. However, everyone can lower their mortgage payments by lowering their homeowners insurance premiums. For ideas, check out our article on how to save on homeowners insurance.

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