Home Insurance vs. Mortgage Insurance: Clearing the Confusion
Lenders often ask for two very different insurances when you buy a home. They sound similar, but they protect different things, follow different rules, and end for different reasons:
- Home (Homeowners) Insurance protects you and your property from fire, water damage, theft, storms, and liability claims.
- Mortgage Insurance protects the lender if you stop making payments. It doesn’t repair your house or replace stolen items.
If you remember nothing else: home insurance = your stuff & liability; mortgage insurance = lender’s risk.
At a glance: what each policy actually does
| Topic | Homeowners Insurance (HOI) | Mortgage Insurance (PMI/MIP/LMI) |
|---|---|---|
| Protects whom? | You (your dwelling, belongings, liability) | Your lender (if you default) |
| When is it required? | Usually required by lenders until loan is paid off; wise to keep even after | Required when down payment is below a program threshold (often <20% on conventional loans) |
| What does it pay for? | Repairs/rebuild, personal property, loss of use (hotel/meals), liability lawsuits | Lender’s losses on the loan—not your repairs |
| Who chooses the provider? | You | You (conventional) or program rules (e.g., FHA) |
| How long do you pay it? | Annually, as long as you want coverage | Until you reach a target equity/LTV or refinance (program-specific) |
| Typical cost drivers | Rebuild cost, materials, age/condition, claims history, deductible, local risks | Loan-to-value (LTV), credit score, loan type, mortgage program, whether it’s borrower- or lender-paid |
What it costs (typical ranges)
These are broad, market-typical ranges. Your numbers will vary by home value, location, lender, and program.
- Homeowners insurance: commonly 0.4%–1.5% of the insured dwelling value per year. National averages translate to roughly $1,200–$2,800/year for many owner-occupied homes, but coastal, wildfire, and severe-weather regions can run higher.
- Conventional PMI (private mortgage insurance): roughly 0.2%–2.0% of the loan amount per year. Most well-qualified borrowers with ~5–15% down see something around 0.5%–1.1%.
- FHA MIP (for FHA loans): an up-front premium (commonly 1.75% of the base loan) plus an annual premium (often around 0.55% on many 30-year loans, varying by term and LTV). The up-front can be financed.
- Other programs: VA loans have no monthly mortgage insurance but charge a one-time funding fee; USDA loans have a smaller up-front guarantee fee plus an annual fee.
A quick cost example (conventional, 5% down)
Assume a $350,000 purchase, 5% down → $332,500 loan amount.
| Item | Example figure |
|---|---|
| Homeowners insurance (assume $2,200/year) | $183/month |
| PMI at 0.8% of loan | $2,660/year → $222/month |
| Monthly impact (HOI + PMI) | $405/month |
If you raise the down payment, improve credit, or switch loan types, the PMI piece can fall quickly—sometimes by $50–$150+/month for the same house.
How and when mortgage insurance goes away
Not all mortgage insurance behaves the same. Here’s the practical breakdown most buyers need.
| Loan type | Can it be removed? | Typical rule of thumb |
|---|---|---|
| Conventional loan with borrower-paid PMI (BPMI) | Yes | Request cancellation at 80% LTV (based on original or current value, depending on rules) with solid payment history; automatic at 78% LTV if you’re current |
| Conventional with lender-paid PMI (LPMI) | Not directly | The lender “bakes” PMI into your interest rate; you generally must refinance to remove it |
| FHA loan with MIP | Sometimes | With ≥10% down, annual MIP typically lasts 11 years; with <10% down, it often runs for the life of the loan (many borrowers refinance later to drop it) |
| VA loan | N/A | No monthly mortgage insurance; one-time funding fee instead |
| USDA loan | Partly | Has annual fee; removal generally requires refinance |
Tip for conventional loans: If your area has appreciated, you may reach 80% LTV faster than scheduled. A new appraisal (ordered through the lender’s process) can help you drop PMI months—or even years—early.
What homeowners insurance actually covers (and doesn’t)
Covered (subject to your policy and limits):
- Dwelling structure (walls, roof), other structures (sheds/fences), personal property, loss of use (hotel/meals if you can’t live at home), personal liability (lawsuits, dog bites, injuries on your property).
Not automatically covered:
- Flood (rising water from outside) requires a separate policy.
- Earthquake (in many places) requires a separate endorsement/policy.
- Wear and tear, poor maintenance, and long-term leaks are typically excluded.
Deductibles matter: Many regions use special percentage deductibles (e.g., 1–5% of dwelling limit) for wind/hail or named storms. On a $300,000 dwelling limit, a 2% storm deductible = $6,000 out-of-pocket before insurance pays.
Myth vs. fact
| Myth | Fact |
|---|---|
| “Mortgage insurance repairs my house after a storm.” | False. Mortgage insurance only protects the lender. Your homeowners policy funds repairs. |
| “I have 20% down, so I don’t need homeowners insurance.” | False. Most lenders require home insurance regardless of down payment; even if they didn’t, going without is risky. |
| “PMI always lasts for 30 years.” | False. On conventional loans, you can request removal at 80% LTV and it’s automatic at 78% (if current). FHA has different rules. |
| “HOI and PMI are interchangeable or bundled.” | False. They’re separate contracts with separate costs and purposes. |
How to shrink both costs (without shrinking protection)
Lower the homeowners premium
- Raise the deductible (only if you have savings to cover it).
- Install risk-reducing devices (monitored smoke/CO alarms, water-leak sensors with auto shutoff, centrally monitored security).
- Ask about mitigation credits (roof updates, wildfire/defensible space, storm shutters).
- Bundle with auto where it truly saves (run both quotes).
- Right-size coverage A (dwelling) to the rebuild cost, not market price.
Lower or remove mortgage insurance
- Increase your down payment to reach 20% LTV (conventional).
- Make principal prepayments to hit the 80% LTV cancellation mark faster.
- If your home appreciates, request PMI cancellation with a current valuation (ask your lender about their appraisal process).
- Consider a refinance: better rate + new LTV can eliminate PMI or FHA MIP (check closing costs and break-even).
The budgeting view: “total-year” cost beats sticker price
Don’t compare only monthly premiums. Compare the total-year cost you’re likely to face, including deductibles and expected out-of-pocket.
Mini “bad-year” example (water damage + hotel nights)
| Item | Basic policy | Upgraded policy (water backup + higher ALE limit) |
|---|---|---|
| Annual premium | $2,050 | $2,270 |
| Basement backup loss | Not covered | $12,000 covered, $1,000 deductible |
| Hotel/meals (10 days) | $1,000 cap reached early | Higher cap—fully covered (within limits) |
| Net in a bad year | You pay $13,000+ | You pay $1,000 |
Sometimes paying $220 more per year is the difference between a manageable repair and a five-figure hit.
First-time buyer checklist (printable)
Before closing
- Get two homeowners quotes with the same limits/deductibles for a fair comparison.
- Confirm special deductibles (wind/hail/named storm) in dollars, not just percentages.
- Ask your lender which mortgage insurance type you’ll have (borrower-paid vs lender-paid; conventional vs FHA/other) and when/how it can be removed.
- Decide if you want to finance FHA’s up-front premium or pay it in cash (if using FHA).
- Verify your escrow estimate includes both HOI and any mortgage insurance.
After move-in
- Create a photo/video inventory of rooms and serial numbers—huge time saver at claim time.
- Add water-leak sensors in kitchens, baths, laundry; consider an auto shutoff valve.
- Review your liability limits; consider an umbrella policy once assets and income grow.
- If you have PMI, set a calendar reminder to recheck LTV each year (payments + appreciation).
FAQs you’ll get from clients (and straight answers)
Q: Can I cancel homeowners insurance once I hit 20% equity?
A: No. Equity affects PMI, not HOI. Lenders usually require HOI for the life of the loan—and even without a lender, dropping HOI is a major risk.
Q: Does PMI help me qualify?
A: Yes—PMI exists so lenders can approve borrowers with lower down payments while managing their risk.
Q: If I refinance to remove PMI, what should I watch?
A: Compare the interest rate, closing costs, and recoup time. A small rate cut plus no PMI can outweigh closing costs quickly, but do the math.
Q: What about condos and townhomes?
A: You’ll need a condo (HO-6) policy for “walls-in” coverage and your contents; your HOA master policy handles the shell. PMI rules are based on your loan, not the building type.
Bottom line
- Homeowners insurance is for you—it pays to repair, replace, and house you after a covered loss and shields you from liability.
- Mortgage insurance is for your lender—it lets you buy with a smaller down payment, then it ends by equity, refinance, or program rules.