When you purchase a new home, you are inundated with paperwork and red tape that must be completed before you move in. A couple of these important details are mortgage insurance and home insurance. These often necessary precautions must be in place even before the bank will lend you the money to buy your dream home.

 

Some people believe that Home Insurance and Mortgage Insurance are synonymous. They aren’t. One has nothing to do with the other. One covers the lender’s interests, and the other helps protect you. It’s important to understand the difference when you are shopping for your home, especially since you’re placing a large down payment. Let’s take a look at the differences between Mortgage Insurance and Home Insurance and how, even though they are different, they do in fact work together during the home buying process.

 

What is Mortgage Insurance?

 

Mortgage insurance is designed to help the lender in case of loan default. If you are putting less than 20% down on a home you are purchasing, then Mortgage Insurance is mandatory. The lender usually will purchase the policy for you and attach it to the amount of your mortgage premium. In the event of a default, the policy would pay the stipulated amount.

Mortgage Insurance would pay if you were to default on your mortgage through:

• Becoming seriously ill.
• Losing a job.
• Getting divorced.
• Having a death in the family.

After mortgage default, and your home is foreclosed, it is sold at auction. The price of house determines how much your policy will pay out to the lender. Regardless, Mortgage Insurance would cover the gap between the auction selling price and what was initially owed at default.

 

Mortgage Insurance payment is temporary. When you have increased the equity in your home to at least 22%, through paying your mortgage or your home appreciates, you may qualify to stop paying for Mortgage Insurance. However, this is not an automatic event. You would need to contact your lender to request that they cancel your Mortgage Insurance policy.

 

You could also be able to cancel your Mortgage Insurance if your home has increased in value. You would have to get your home appraised, and if the value has gone up, and it has built up to beyond the 22% equity threshold, then you can request that your lender cancel the mortgage insurance.

 

What is Home Insurance?

 

Homeowners Insurance is to help you in the event of damage or loss to your home. With mortgage insurance, you are helping protect the loan. A Homeowner Insurance policy helps cover the value of your home and its contents, shoiuld you experience:

• A theft,
• Vandalism,
• Fire,
• Or storm damage,

Home insurance helps you pay for what was stolen or damaged due to a covered event. Policies vary in coverage depending on the type of policy you purchase, and the amount of coverage selected. You will always want to cover the value of the home, and in most cases, it will be mandatory that you do so by your lender.

 

Keep in mind that not all perils are covered by a basic policy. To cover events like flood, earthquake, and landslides, a separate policy, called a rider, must be purchased. If you have a standard homeowners policy and you experience a flood event, you will not be covered and must pay out of pocket for any repairs. This is why it is essential to know the area in which you plan to move. Know where the floodplain sits and if the area is prone to flooding. It is also wise to know things like crime rate and claim history for your neighborhood.

 

As you can see, Mortgage Insurance and Homeowner Insurance are two entirely different things. It is easy to get them mixed up. The consumer tends to think that because the term ‘mortgage’ is used in the title, that it has to do with helping the buyer. That is far from accurate. Mortgage Insurance helps the lender. If you desire help for yourself, Homeowner Insurance can give you some confidence that the home you purchase will be covered should an unfortunate incident occur.

 

To learn more about how to help protect yourself and your home, contact our team at Protective Agency at (877) 739-9367. Our licensed insurance agents will be happy to answer any questions you have.