While Mortgage Insurance and Home Insurance are Two Very Different Types of Insurance, They Share a Few Things in Common. Both Kinds of Coverage Help Protect a Mortgage Lender’s Financial Investment in a Home.

As your local insurance professional, Morse, of course, is here to help you understand the difference between mortgage insurance and home insurance, how each type of insurance works, and why your lender may require you to have both before you close on a new home.

What is mortgage insurance?

Mortgage insurance is a way for a lender to minimize the financial risk they are taking on when providing a home loan to you. If you fall behind on your mortgage payments or completely stop making payments, mortgage insurance pays out to the lender a portion of the original loan principal so they can make up some of their losses.

When does a lender require mortgage insurance?

The long-standing mortgage industry benchmark for a down payment on a home is 20% of the sale price. When a homebuyer can afford to make this upfront investment in their new property, they are often rewarded with a lower mortgage interest rate and a lower monthly mortgage payment. They also can avoid paying mortgage insurance.

However, many Massachusetts homebuyers, especially first-timers, do not have deep enough pockets to afford this down payment, which can quickly add up to a six-figure sum in today’s hot real estate market. That’s generally okay with mortgage lenders, who can provide you with access to numerous loan options that require a lower down payment than 20%. The trade-off is that you’ll also need to agree to pay the additional cost of mortgage insurance.

The type of mortgage insurance that may be required by your lender depends on the kind of loan you get. For example, if you take out a conventional loan, your lender will likely go through a private insurer to secure private mortgage insurance (PMI). Then, your PMI premium will be included in your monthly mortgage payment, your closing costs, or both. However, borrowers who secure a Federal Housing Administration-insured mortgage loan are typically required to pay a government-provided insurance premium—either an Up-Front Mortgage Insurance Premium, which is collected at closing or rolled into your loan, or an Annual Mortgage Insurance Premium which is payable monthly.

What are the benefits of mortgage insurance for homeowners?

While having mortgage insurance means you pay more each month to your lender than you would if you didn’t have this insurance premium, it also enables you to buy that house you’ve been dreaming about—and start building valuable equity in it—much sooner than if you waited to buy until you saved up a large down payment.

In addition, if home prices in your area increase at a percentage rate that is higher than what you’re paying for mortgage insurance, you’ll be getting a positive return on your investment.

Finally, depending on your gross income, you may be able to deduct private mortgage insurance premiums from your taxes. This might be something to investigate further as tax season rolls around.

What is home insurance?

Home insurance provides a homeowner with broad coverage for the structure of their home; other structures on their property, such as a detached garage; and the contents inside their home. Whether these things are damaged or destroyed by fire, severe weather, vandalism, a fallen tree, or other commonly covered threats, having a homeowners policy typically means you may get help paying to repair, replace, or rebuild what’s been ruined.

In addition, if your home is not fit to live in after a disaster, home insurance typically provides coverage called “loss of use,” which helps you pay for a hotel room or rental place where you can stay while your home is under construction. Loss of use also may cover a percentage of any expenditures you incur while you’re temporarily relocated as long as they are not above and beyond your normal monthly expenses.

Why does a lender require home insurance?

A Massachusetts homebuyer is not legally required to have home insurance prior to closing on a new house. However, if you are going to have a mortgage, a lender can, and typically will, make getting a homeowners policy a requirement of your loan. The lender is making a significant monetary investment in your home, so they want the same assurances you do that if something catastrophic happens to your house due to a covered event, there will be sufficient funds to help return it to its pre-disaster condition.

What are the benefits of home insurance for homebuyers?

Whether you’re required to have home insurance by a lender, or you are loan-free and have no such obligation, there are obvious financial benefits to having a home insurance policy. If you don’t have homeowners insurance when a disaster strikes, you will have to pay out of pocket for all repairs to your home or for a complete rebuild.

In addition, without home insurance, you’re forgoing a critical part of the coverage called personal liability protection. If you, a family member, or a pet are found responsible for an accident that results in a personal injury to another person or damage to another person’s property, this coverage typically helps cover the costs of medical care for the person who was harmed or repairs to their damaged property. This coverage also assists with the legal costs related to your defense and any judgments against you if the accident results in a lawsuit.

Your insurance policy does include coverage limits, which is the maximum amount your insurance company will pay for a specific claim. Because you may end up being personally responsible for covering any additional expenses beyond this limit, you may want to consider supplementing the personal liability protection in your homeowners policy with an umbrella policy.

Have more questions about home insurance? Morse, of course, has the answers.

We hope this explanation of mortgage insurance and home insurance has cleared up how these types of insurance are different and why your lender might be requiring you to get both if you’re buying a new home. We’ve also done our best to demonstrate that mortgage insurance and home insurance have benefits for both lenders and homeowners.

The Morse team knows that the homebuying process, and being a homeowner, can often be challenging, confusing, and overwhelming. So, if you have more questions about home insurance, need help finding a home insurance company and getting the right coverage for your specific property, or would like to discuss other personal insurance needs, please give our experienced team a call. Our local and knowledgeable professionals are always here for you.

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