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Difference Between Homeowners & Mortgage Insurance

March 14, 2013

While often confused, Mortgage Insurance(MI) and Homeowners Insurance are greatly different types of insurance that cover greatly different things.

Here’s the cleanest summary:

Homeowners Insurance covers you, and your home, you will always need this type of insurance. MI covers the bank, get rid of this as soon as you can.

What is Mortgage Insurance?

MI, is an insurance premium paid by the borrower(you) in the form of a higher rate, monthly payment or lump sum rolled into your mortgage. In the case of conventional mortgages, MI is charged whenever a borrower finances over 80% of the value of their home. This insures the bank(not you) in the case of a borrower default. In the case of government mortgages(FHA, VA, USDA), the MI(or equivalent) is charged to insure, or guarantee the bank’s making the loans.

How Can I Minimize my MI payments?

If you have a conventional mortgage, then get your mortgage to roughly 80% of your home’s value by refinancing to a loan where your new mortgage represents 80% of your home’s new appraised value, reappraising your home with your existing servicer, or paying your mortgage down to 78% of the value represented by the appraisal on your purchase or last mortgage refinance.

If you have a USDA, VA or FHA mortgage

For those borrower’s who are in a Government mortgage, it’s less cut and dry as a conventional mortgage, FHA and USDA have monthly premiums, FHA, USDA and VA all have up front premiums, so the government mortgages all have heavier insurance premiums making a conventional mortgage a cheaper long term investment.

What is Homeowners Insurance?

Homeowners Insurance protects you against damage to your home. You will always need this as it is insurance for you. The best way to minimize this cost is to shop insurance policies.

To conclude, although Homeowners Insurance and Mortgage Insurance often get confused, they are different types of insurance, covering very different items. Knowing the difference and how to minimize their costs can save you a great deal.

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- Jayson Hardie on Growth

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