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What does mortgage insurance cover?

By Liz Keuler

October 2020

Buying a home is a big investment – for you and for the lender that agrees to loan you money to purchase the house. To mitigate the risk for both parties, there are 2 kinds of insurance you’ll hear about during the process of getting a mortgage. But despite sounding similar, homeowners insurance and mortgage insurance are not the same thing.

Homeowners insurance vs mortgage insurance

It’s easy to be confused! Homeowners insurance vs. mortgage insurance – what’s the difference?

Homeowners insurance protects your investment by insuring your home against:

  • Damage to the home and its contents from disasters (fire, storms, etc.)
  • Claims of negligence or inappropriate action that result in someone's injury on your property

Most lenders require you to take out a homeowners insurance policy when they provide the financing for you to buy a home. Does that mean homeowners insurance is included in a mortgage? No. It's required, but it protects your investment and any claims would be paid to you, the homeowner. That’s why you choose your own homeowners insurance and provide proof of it at your closing.

So what does mortgage insurance cover?

In contrast to homeowners insurance, mortgage insurance (or MI) protects the lender. Mortgage insurance covers a portion of the mortgage to help the lender recoup a percentage of loss in the event of foreclosure.

Not every home loan involves mortgage insurance. Generally, lenders require MI for loans with down payments of less than 20%. If you put 20% or more down on a house, MI probably won’t be part of your conversation with a lender.

But a 20% down payment is a tall order for many of us – especially first-time homebuyers. In 2019, the National Association of Realtors found that first-time homebuyers put down 6% on average. Mortgage insurance can make it possible for would-be homeowners to afford a house sooner, afford a larger range of houses, or save money for other priorities.

MI is offered both by private mortgage insurers (for conventional loans) and by the Federal Housing Administration (FHA). (Full disclosure: Readynest is brought to you by MGIC, a private mortgage insurance company.) Learn more about mortgage insurance here.

Is mortgage insurance the same thing as mortgage life insurance?

In a word: No! Mortgage life insurance is a very specific kind of life insurance that pays off your mortgage in the event of your death. It’s not required to get a mortgage. 

Who pays for mortgage insurance?

Whether it’s an FHA or conventional loan, the borrower typically pays for mortgage insurance.  

The most common private MI option is a monthly premium appearing on your monthly mortgage statement. Because it protects the lender’s investment, your lender will choose the private mortgage insurance provider. The good news is not only can private MI help get you into your home sooner, you can usually cancel it when you reach 20% equity in your home. In fact, the Homeowners Protection Act of 1998 requires that private MI be canceled automatically when you reach 22% equity in your home.

If you choose an FHA loan, mortgage insurance premiums are also included in your monthly statement. In addition, you’ll be responsible for an upfront premium; it can be financed into your overall loan amount, but that will increase your monthly payment as well. FHA mortgage insurance can be canceled after 11 years of payments, but only if you put down at least 10%.

The bottom line

While both homeowners insurance and mortgage insurance are an extra expense, they provide important benefits and protection for you and for your lender. Mortgage insurance can help make your initial investment in a home more affordable for you while lowering the risk of lending to an acceptable level for your mortgage provider. And once you take possession of the house, homeowners insurance protects your investment. With less risk, you can feel even more comfortable enjoying the rewards. 

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Liz Keuler is the editor of Readynest. She spent a decade meandering through radio, nonprofits and the corporate world before convincing MGIC to hire her based on her staunch grammatical convictions. She lives in a charming 100-year-old bungalow on Milwaukee’s East Side. Her interests include old Ernst Lubitsch films, new action movies, 60s girl pop, Regency romance novels, word games, sewing and shallots.
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