Column: Private Mortgage Insurance vs. Homeowners Insurance

When it comes to purchasing a home, understanding the various types of insurance involved is crucial. Two commonly confused types are Private Mortgage Insurance (PMI) and homeowners' insurance, each serving their own purposes. PMI is a form of mortgage insurance typically required for conventional loans when a buyer makes a down payment of less than 20% of the home's value. This insurance protects your lender in case you buyer defaults on loan payments. A smaller down payment presents a higher risk for the lender. However, it's important to note that PMI doesn't have to be a lifelong commitment. Homeowners can generally eliminate PMI from their monthly payments when your loan balance gets below 80% of the home's purchase price or by building 20% equity in the home. This can happen just by value of your home increasing if the market goes up. If you're putting down less than 20%, PMI premiums will likely be part of your monthly mortgage expenses for some time. The cost of PMI can vary based on the size of your loan, your down payment, and your credit score. It's also important to differentiate between PMI and FHA mortgage insurance. While both types of insurance help homebuyers qualify for loans they might not otherwise secure, they primarily protect the lender, not the buyer. PMI is linked to conventional loans, whereas FHA mortgage insurance is associated with FHA loans. One key difference is the cancellation policy: PMI can usually be removed once you reach 20% equity in your home, while canceling FHA insurance can be more complex and might require refinancing. Additionally, PMI is only necessary for buyers who make down payments under 20%, while FHA loans typically require mortgage insurance regardless of the down payment size. This is because FHA loans have lesser requirements on the borrower to get financing, giving the lender more risk. On the other hand, homeowners' insurance is essential for protecting your property from damage and providing liability coverage in the event of accidents on your property. This insurance is usually a requirement of mortgage lenders to ensure their investment is protected. However, homeowners insurance also protects your investment. Homeowners insurance typically includes several types of coverage: dwelling coverage for repairing or rebuilding your home, personal property coverage to replace stolen or damaged items, liability coverage for accidents that occur on your property, and additional living expenses (ALE) to cover temporary lodging if your home becomes uninhabitable. Given that a home is often the most significant investment an individual will make, the potential financial impact of losing it or its contents to theft, fire, or other disasters can be devastating. Moreover, homeowners face personal liability risks, such as a visitor injuring themselves on their property, which could lead to costly legal repercussions. As someone who experienced a total loss home fire, I can assure you it seems expensive right up until you need it and then it becomes priceless. PMI and homeowners insurance may sound similar, they serve different functions in the realm of homeownership. PMI is primarily about protecting the lender in cases of default when the down payment is low, while homeowners insurance is about safeguarding your home and belongings from unforeseen events. Understanding both can help you make informed decisions as you navigate the journey of homeownership. -Kira Witherwax is a licensed associate real estate broker and member of the National & NYS Association of Realtors®. She is also past president of the Clinton County Board of Realtors®

Signup for our newsletter

Column: Private Mortgage Insurance vs. Homeowners Insurance

COMPANY

CUSTOMER SUPPORT

SUBMISSION FORMS

BEYOND THE NEWS