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Both may be required when you're buying a home — but what's the difference?
Buying a home is complicated and stressful: the last thing you want to think about is the various types of insurance related to homeownership. But it's important to understand the difference between mortgage insurance and home insurance. Depending on the financial details of your home purchase, mortgage insurance — also known as private mortgage insurance, or PMI — may be required and will become a part of your expenses. Your lender may also require homeowners insurance, but you shouldn't assume PMI and home insurance are one and the same.
Let's explore the differences, and who and what each type of insurance protects.
While homeowners insurance protects your property and assets, mortgage insurance is meant to protect the lender. Mortgage insurance is required if you don't make a down payment of at least 20% of the home's value when you purchase the property. In the event you can't make mortgage payments and you default on your loan, it safeguards your mortgage lender from the financial loss. In no way does it benefit or protect the homeowner or their assets — though the homeowner is responsible for paying for PMI, it only protects the lender.
When you buy a home, a title company must ensure the title is "clean" — that is, checking to see there are no outstanding claims or liens on the property. Title insurance protects owners and lenders against financial loss arising from defects in title documentation, unsettled lawsuits or liens, and issues of fraud or forgery in the home's ownership records. While most insurance types protect against hazards that may occur in the future, title insurance safeguards against potential discrepancies during the title transfer process that may have occurred in the past. One of the most common title insurance claims is for missed back taxes.
While title insurance is not required by law when you purchase a home, many lenders will require it as a condition of getting financed.
Homeowners insurance covers the structure of the home, along with personal property and provides liability insurance. It protects your home if it sustains damage as a result of a covered loss, and helps pay to repair the damage or replace the home if it’s a total loss. Read a more in-depth analysis of what homeowners insurance covers.
In no situation does mortgage insurance cover anything to do with your house, your personal property, or liability — unless you cease paying your mortgage.
Paying for PMI raises the overall cost of homeownership. Budgeting for mortgage insurance is something to considerbeforebuying a home. PMI generally costs 0.5% to 1% of the total loan amount. This doesn’t sound like much, but let’s put it into context.
If you take out a mortgage loan for $200,000, and your PMI fee is 1%, that’s an additional $2,000 a year (or $166 per month) dedicated to protecting your lender, not your home.
That money could be better spent going toward homeowners insurance, which explicitly protects you and your home, and can cost anywhere between $700 to $1,500 per year depending on a number of factors like where you live and how large the structure of your home is. With some financial planning, you can avoid paying PMI, instead putting your money toward a good home insurance policy instead.
Shopping for homeowners insurance? Call The Zebra today to explore homeowners insurance options.