Home purchases may require either or both of these insurance types. Both mortgage insurance and homeowner’s insurance have their own benefits. As a tenant or homeowner, it pays to understand which you need – and to what extent – especially if your landlord doesn’t require them.
In general, mortgage insurance policies protect people against borrower default. In other words, lenders need this type of insurance to protect themselves against the event that the homeowner that borrowed the money can’t pay it back. Homeowner’s insurance is more direct and more like what most people think of as insurance. The assets of the homeowner, such as personal property, are protected by homeowner’s insurance policies in the event of fires or other destructive and unpredictable events.
This broad policy difference is not the only qualifier, however, when deciding which insurance policy you need and how much. Read on to learn about more key differences between these two types of insurances and how to know which you need as a homeowner or renter. This way, you can compare home insurance quotes accurately.
What are the Main Types of Homeowner’s Insurance?
The first thing to do after realizing that mortgage insurance and homeowner’s insurance are not the same thing is to separate homeowner’s insurance policies by coverage. There are four main types of coverage included in homeowner’s insurance plans and all are important when gauging the value of individual policies.
Liability coverage is the one most important for homeowners who are also renters or landlords. It covers you against medical and legal bills from accidents or injuries on your property. Dwelling coverage also covers damages but to the structure of the building and anything else on the property. Wind damage is one of the most common payouts in the case of dwelling coverage.
Personal property coverage is probably what most people think of when they hear “homeowner’s insurance.” It covers belongings in the home against burglary or damage. Lastly, there’s additional living expenses coverage, which gives you money to live somewhere else if your house is uninhabitable for a while due to pests, fire damage, or weather.
Each of these types of coverage has its limits and each policy varies. The types of damage covered will not be the same on every policy, so it pays to look over the fine print and find the policy that works for you.
As just one example, most homeowner’s insurance policies don’t cover flood protection or the resulting damages. That’s often a separate policy.
When Would you Need Mortgage Insurance?
Mortgage insurance protects moneylenders from borrowers that default on their loans in the case that they can’t pay them back. You may be wondering what this has in common with homeowner’s insurance at all.
The common element is protecting moneylenders. Homeowner’s insurance protects the assets of the moneylender, which are really the homeowner’s assets, by giving homeowners the money to pay for damages that they can then pass on to their lender. Mortgage insurance skips a step and only protects the lender.
If you’re a homeowner that wants to make small down payments on a mortgage, you can expect to have mortgage insurance policies required by the lender. They don’t want to take the risk that you can’t pay off your loan without some protection.
Can you ever forgo Insurance?
In some scenarios, you don’t need mortgage insurance. If you pay for your house in cash or pay off your mortgage, you don’t need a mortgage insurance policy. Technically, in that event, you wouldn’t need homeowner’s insurance either. However, these policies are recommended to protect property and pay for damages you could be liable for, even if you buy a house in cash.
If you need a mortgage, one or both of these policies will probably be required by your lender before you can sign anything, so keep that in mind.
Homeowners and mortgage insurance are different methods of obtaining the same goal: protecting the assets of moneylenders. While mortgage insurance does this directly, homeowner’s insurance policies also protect property owners from damages and liabilities, while indirectly protecting moneylenders by keeping their borrowers afloat.
Whether you’re a lender or a borrower, use this guide to better understand the two types of insurance and know which you need.