Just like sunscreen protects you from the natural elements, home insurance does the same thing for your house and the items inside. Proper protection is a must, and whether it's for your skin, your car or your home, it’s important to research what protection will be best for you.
When you buy a home, especially for the first time, you’ll hear a lot of terms brought up that you might not understand. Though you’ve likely done your own research on home insurance, the term mortgage insurance (also known as private mortgage insurance, or PMI) might throw you for a loop. But it’s just a way for your lender to get some financial sunscreen for your loan. Learn more about this coverage and who is required to get it, below.
Mortgage insurance and home insurance aren’t the same thing. While they’re both types of insurance, one protects your lender and one protects you. To make sure you’ve got the coverage you need, take the time to know the difference between the two.
Home insurance provides you with protection for your dwelling, belongings and liability. On the other hand, mortgage insurance protects the lender from financial losses should you be unable to pay your mortgage each month. As you probably already know, home insurance is mandatory. But mortgage insurance? That’s a different story.
What homeowners insurance protects casts a wide net — covering your home’s structure, personal belongings, liability and additional structures on your property. And though home insurance generally costs more monthly than mortgage insurance, it’s well worth the money for the protection you get.
Mortgage insurance, also known as private mortgage insurance (PMI), is a policy that financially protects the lender. Before approving your loan, mortgage lenders typically look for those with good credit history, steady employment, a low debt-to-income ratio, and a 20 percent or larger down payment on the property’s sale price. They may still approve your loan if you don’t meet all of the above criteria, though they’ll often require PMI for extra assurance.
PMI is an excellent option for those who don’t want to put down 20 percent but still want to get started on investing in property. Also, you’ll likely have to pay mortgage insurance each month until you reach 20 percent down or until you reach an agreed-upon percentage of your total mortgage (usually around .5 to 1 percent).
How much PMI will cost you depends on both your credit history and how much you borrow. Usually, PMI is a percentage of your total loan (from .5 percent to 2 percent), so you’ll owe more in mortgage insurance the more expensive your home is. If you do have your home insurance and property taxes in escrow, you’ll likely pay your PMI the same way during your monthly mortgage payments.
PMI is a percentage of your total loan (from .5 percent to 2 percent), so you’ll owe more in mortgage insurance the more expensive your home is.
It’s relevant to note that PMI can be tax deductible in certain situations — the caveat is that this only applies if you itemize your federal taxes, which doesn’t apply to most homeowners.
Unlike home insurance, mortgage insurance isn’t always required. If you’re purchasing a traditional loan and plan to put down 20 percent or more of your loan amount, PMI typically won’t be required. But if you’re putting down less than 20 percent, have a less-than-stellar credit history or you’re applying for an FHA loan, this extra protection may be a requirement. This is because most mortgage companies want extra assurance that they’ll get their money back. Because of this, your mortgage company will typically choose the PMI provider as well.
So once you’ve purchased your home and mortgage insurance you’re done, right? Think again. If you want to protect your home and belongings fully, there are a few other insurance policies to consider. If you want to protect yourself from any potential issues with the title, owner’s title insurance (or even enhanced title insurance) is your best bet. On the other hand, P&C insurance offers additional protection for your property and liability throughout the life of your mortgage. For more information on the best insurance riders to buy based on your needs, check out our learn center.
If you hear mortgage insurance and run for the hills, think again. While it’s the recommendation to put down at least 20 percent when purchasing a home, that isn’t always possible for everyone. And if your dream is getting a home sooner rather than later, PMI is a great option to make that dream come true. Just make sure you properly budget for mortgage insurances’ added monthly expense.
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