Are paying for both Mortgage Insurance and homeowners insurance?
If you are, do you even need both policies?
Unless you paid cash for your home or put more than 20% down, both of these policies were most likely required by your mortgage lender.
Because both of these policies are lender requirements, there is often confusion about what they cover and why you need them.
The key to understanding the difference is knowing who benefits from the coverage these policies provide.
Let’s start with Mortgage Insurance. This policy is actually to protect your lender. Just like the name suggests, the policy is for the mortgage.
In the event, the borrower doesn’t make their payments, and the lender needs to foreclose on the property, mortgage Insurance helps the lender recoup some of their losses.
While mortgage insurance can have different names when associated with different loans types at the end of the day, the purpose is the same, to protect the lender from potential buyer default.
Mortgage lenders look to minimize their risk when making loans, so the amount of cash or equity a borrower has in the deal affects the terms, and requirements of the loan. The more equity or cash, the more favorable the loan terms.
This includes whether or not there is going to be a requirement for mortgage insurance. On a conventional loan, mortgage lenders will waive the requirement for mortgage insurance with a minimum of a 20% down payment.
Of course, the easiest way to avoid mortgage requirements altogether is to pay cash for your new home, but there aren’t a lot of buyers that can pull that off.
The other type of insurance associated with the purchase of a home is “Home Owners Insurance”, you’ll sometimes hear this referred to as “Hazard Insurance”.
The purpose of this policy is twofold. First, it protects the lender’s investment in the home which is why the lender requires this policy. But it also protects the homeowner from loss due to things like fire, or other natural disasters.
This policy also protects the homeowner from liability in the event someone is injured on the property.
Having a homeowner's insurance policy is just a good idea for most homeowners because the cost of repair or replacement after a disaster can be devastating.
Even all-cash buyers should have a homeowners insurance policy in place to protect themselves from unexpected losses.
While a homeowner's insurance policy is a great idea, you should look to eliminate any mortgage insurance as soon as possible.
The amount of equity you have in the property is usually the determining factor when it comes to eliminating the requirement for this policy. But it also depends on other things like how long the loan has been in place, the loan type, and the lender.
If you’d like to learn about eliminating your mortgage insurance policy, give us a call, we can help point you in the right direction.
I’ve written an article that goes into detail about mortgage insurance and homeowners insurance, you can find the article on the springshomes.com blog
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