At a glance, it might seem confusing whether mortgage insurance and homeowners insurance are one and the same. While they both offer protection related to home ownership, the nature and purpose of their coverage are entirely different, as does the need for any or both of them. If you are asking when are they and when are they not needed, the answer lies on how you intend to finance ownership of your home.
Homeowners insurance is your protection against risks that include damages to your home, its contents, and other extended liabilities as may be stipulated on your policy. If you are buying a home through a mortgage, your homeowners insurance safeguards your interests as well as that of your lender. In case of damage due to fire or a natural disaster, it will be your protection from any financial trouble that can possibly arise.
Mortgage insurance, on the other hand, protects the lender from the possibility of a borrower defaulting on the mortgage. It safeguards your lender’s finances especially if you are deemed to be a high-risk borrower. That is, if your down payment is below 20% of the total purchase value, the chances that you will fail in paying the mortgage on time is considerably higher. In this case, your lender will require you to purchase mortgage insurance on top of a homeowners insurance.
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When do you need a homeowners insurance?
A homeowners insurance is protection for your property and for your family. It covers you from unforeseen calamities and damages that arise from untoward incidents. Any homeowner would benefit from the coverage that this type of insurance provides. Whether you’re buying your house in cash or you acquire it through a mortgage, the protection it offers extend as long as you adhere to what the policy provides and as long as you keep ownership of your home.
If you bought your home through a mortgage, any damage that would require you to spend from your own pocket will likely affect your ability to pay the mortgage. Thus, homeowners insurance safeguards your home and your family, as well as your capacity for paying the mortgage on time.
When do you need mortgage insurance?
By definition, mortgage insurance compensates a lender or investor in the event that a borrower defaults on the payment. In contrast to homeowners insurance, it protects the financial interest of the lender. While mortgage insurance is admittedly for the benefit of the lender, it does benefit the borrower to some extent. When a borrower defaults on payment without any mortgage insurance, the trouble that follows is something that any borrower would try to keep away from.
If you are paying less than 20% of the total home purchase, your lender will require you to buy mortgage insurance and home insurance. But while your homeowners insurance should stay as long as you own your home, your mortgage insurance might be required by your lender only on the first few years of your purchase, after you’ve made subsequent payments and you’ve established your credibility as a borrower.
When are homeowners insurance and mortgage insurance no longer needed?
Depending on the mortgage agreement, you can request for an appraisal. After a certain number of years and your payable amount is already less than 80% of the total purchase value, you have a chance of doing away with your mortgage insurance and retaining only your homeowners insurance. Remember that your downpayment of less than 20% is a significant factor why your lender required you to buy mortgage insurance in the first place. But if you’ve already paid off your mortgage entirely, then there’s no more question. Of course, you no longer need mortgage insurance.
In the case of homeowners insurance, buying a home in cash gives you the option of whether you need to buy one or not. And when you have totally paid off your mortgage, the prerogative entirely rests on your shoulders. But while it sounds pleasing to know that you’ll be spending less, the benefit of being covered by a homewoners insurance as long as you keep ownership of your home certainly outweigh the expenses.