Home Insurance Vs. Mortgage Insurance: Understanding The Differences

​When it comes to protecting your home and investment, it's essential to distinguish between "mortgage insurance" and "home insurance." Despite their similar-sounding names, these two types of insurance serve distinct purposes. Whether you're a first-time homebuyer or a seasoned homeowner, understanding the differences between them is crucial.

Understanding Mortgage Insurance
What is Mortgage Insurance?: Mortgage insurance, often referred to as private mortgage insurance (PMI), is primarily designed to protect lenders, not homeowners. It comes into play when a borrower purchases a home with a down payment of less than 20% using a conventional loan.

Purpose of PMI: The primary purpose of PMI is to provide a safety net for lenders in case the borrower defaults on their mortgage payments. Lenders seek borrowers who pose lower risks, typically characterized by:

• Stable income
• A down payment of 20% or more
• Good credit history
• Low debt-to-income ratio

Cost of PMI: PMI costs can range from 0.58% to 1.86% of the initial loan amount, in addition to extra expenses of up to $70 per $100,000 borrowed. These costs are usually paid monthly as part of the mortgage premium. Borrowers can also choose to pay PMI as an upfront lump sum. The terms and conditions of PMI are outlined in loan estimate and closing disclosure documents.

Benefits of PMI: While it may seem like an additional expense, PMI makes homeownership more attainable for those who cannot afford a substantial down payment. It allows borrowers to secure a mortgage with a lower down payment, expanding access to homeownership.

Understanding Home Insurance
What is Home Insurance? Home insurance, also known as homeowners insurance, is designed to protect homeowners and their properties from financial losses resulting from various hazards, such as fires, natural disasters, theft, and more.

Coverage Options: Home insurance policies offer varying levels of protection based on the policyholder's needs. These options may include open perils (covering a broad range of risks) or named perils (specifically listed hazards). Standard homeowners insurance typically includes coverage for:

• Extra living expenses, covering temporary housing and food costs when forced to leave home due to a covered loss
• Personal liability protection, covering legal claims resulting from accidents or injuries on your property
• Personal belongings
• Dwelling (the structure of your home) and detached structures

Common Perils: Home insurance often covers common perils like theft, explosions, falling objects, vandalism, and more. The specific perils covered are outlined in the policy.

Mandatory for Mortgaged Homes: When you have a mortgage on your home, it's generally mandatory to have homeowners insurance in place. This requirement safeguards your mortgage company's investment in the property.

Which is Better?
In summary, mortgage insurance and home insurance serve entirely different purposes:

Mortgage Insurance (PMI): Protects lenders if borrowers default on their mortgage payments, making it easier for individuals with lower down payments to access homeownership.

Home Insurance: Provides coverage for property and belongings, along with liability protection for covered claims, safeguarding homeowners from financial losses due to various hazards.

Neither is inherently "better" than the other because they address different aspects of homeownership. In fact, they often work in tandem to provide comprehensive protection for both lenders and homeowners. While PMI benefits lenders, home insurance is a crucial safeguard for homeowners, ensuring their investment and belongings are protected in case of unexpected events.

At Appletree Insurance, we do our best in making sure that our clients are well-protected with affordable and comprehensive policies. We make sure to go the extra mile to help you with your needs. To learn more about how we can help you, please contact our agency at (603) 881-9900 or CLICK HERE ​to request a free quote. 

Disclaimer: The information presented in this blog is intended for informational purposes only and should not be considered as professional advice. It is crucial to consult with a qualified insurance agent or professional for personalized advice tailored to your specific circumstances. They can provide expert guidance and help you make informed decisions regarding your insurance needs.