For first time homebuyers, the terms “mortgage insurance” and “homeowners insurance” can get a little confusing.
Let’s break down what these terms mean, and what you need to know about the different types of insurance involved when purchasing your home.
- What is mortgage insurance?
- How much does mortgage insurance cost?
- What’s the difference between MI, PMI, MIP, and UFMIP?
- How can I eliminate mortgage insurance fees in the future?
- What do I need to know about homeowners insurance?
- What’s the difference between liability coverage VS hazard insurance?
- What are some tips for shopping around for different homeowners insurance policies?
What is mortgage insurance?
If you buy a home with less than a 20% down payment, then you may have mortgage insurance fees as part of your monthly mortgage bill.
Mortgage insurance reduces risks for lenders and protects lenders in the event that a homeowner defaults on their loan.
Because mortgage insurance reduces risk for the lender, this allows lenders to approve someone for a home loan without requiring them to make a 20% down payment.
You can think of mortgage insurance as a workaround that gives you the option to get into a home without having to put 20% down.
How much does mortgage insurance cost?
If you get a home loan that requires mortgage insurance, your lender will disclose what those mortgage insurance fees would be ahead of time – before you commit to a mortgage and close on a home.
The monthly mortgage insurance fee can vary depending on several factors such as loan amount, mortgage type, down payment amount, credit score, interest rate, and loan terms.
Generally speaking, on a conventional loan, the cost of private mortgage insurance (PMI) can range from about 0.5% to 1.5% of the loan amount per year.
For an FHA loan, the annual mortgage insurance premium can range between 0.45% to 1.05% of the loan amount.
That annual mortgage insurance fee is then divided by 12 months, so you would pay a portion of the annual mortgage insurance fee on a monthly basis.
When it comes to types of mortgage insurance fees, there are a few different acronyms that come up. Let’s break those down below:
What’s the difference between MI, PMI, MIP, and UFMIP?
MI stands for “mortgage insurance,” which is the more general term.
PMI means “private mortgage insurance” and is specific to conventional loans.
If you get a conventional loan and put down less than a 20% down payment, then you’ll likely pay PMI fees as part of your monthly bill.
MIP stands for “mortgage insurance premium.” MIP is specific to FHA loans.
On an FHA loan, the MIP refers to the monthly fee.
But FHA loans also come with an “upfront mortgage insurance premium” or UFMIP, which is a one-time fee paid at closing. On an FHA loan, the UFMIP cost is 1.75% of the loan amount.
In short, the acronyms MI, PMI, MIP, and UFMIP are all terms to describe mortgage insurance.
How can I get rid of mortgage insurance fees in the future?
If you have a conventional loan, then as you pay off your mortgage, you may be able to get your PMI fees removed.
Once you hit a Loan-To-Value ratio of 80% or lower (meaning you’ve paid off at least 20% of your loan), you have the right to request to have your mortgage insurance removed without needing to refinance.
However, you may need to get your home reappraised to fulfill that request, so keep that in mind.
Once you hit a Loan-To-Value ratio of 78%, then that PMI monthly fee should be removed automatically.
But this rule does NOT apply to FHA loans.
Your mortgage insurance premium (MIP) on an FHA loan generally will remain for the life of the loan unless you refinance to a different loan product altogether.
However, there have been different options for removing mortgage insurance from FHA loans in the past, and the guidelines have changed over the years.
Talking to a mortgage advisor can help you get the most updated information as far as mortgage insurance fees and what you can do to get rid of those fees in the future.
What do I need to know about homeowners insurance?
In order to buy a home, you will likely be required to get homeowners insurance and have that proof of homeowners insurance in hand before closing.
Homeowners insurance is completely separate from mortgage insurance. Whereas mortgage insurance reduces risk to the lender, homeowners insurance reduces risk for the homeowner.
But the term “homeowners insurance” itself can be considered an umbrella term, as it refers to a couple different types of policies.
Homeowners Insurance: Liability Coverage & Hazard Insurance Policies
As part of your homeowners insurance, there’s personal liability coverage that may have you covered in the event that someone falls or gets injured on your property.
In addition to liability insurance, there’s also hazard insurance that covers certain hazards such as damage caused by fire, hail, lightning, wind, falling objects, or burglary.
The specific types of hazard insurance policies you need can vary, especially depending on your location.
For example, if you are in a flood zone, you will likely need to acquire flood insurance in addition to your hazard insurance policy. Or if you’re in an area prone to earthquakes, you may be required to get a hazard insurance policy that specifically covers earthquake damage.
What are some tips for shopping around for homeowners insurance policies?
You have the right to do your research and shop around for different insurance policies.
One option to keep in mind: some homeowners choose to bundle their auto and home insurance to save money.
When shopping around for insurance policies, it’s probably a good idea to read each policy in detail so you understand exactly what is and what isn’t covered.
For example, some standard insurance policies don’t cover certain types of water damage, such as if a drain or sump pump overflows, that might not be covered under a standard policy.
However, you can add that water damage coverage as an addendum if you’d like.
Also, when it comes to hazard insurance, you may want to learn about what the local problems or risks are in your new neighborhood.
Besides some of the more obvious risks, there might be other local hazards you need to learn about, especially if you’re new to that area.
When doing your research, you may want to reach out to your new neighbors and ask them about problems or hazards that they’ve seen over the years.
This can give you some great information when shopping around for insurance policies.
Summary: Mortgage Insurance & Homeowners Insurance
- Mortgage insurance protects lenders in the event that a borrower defaults on their loan. This risk reduction in turn allows lenders to approve homebuyers for a loan without requiring a 20% down payment.
- The acronyms MI, PMI, MIP, and UFMIP are all terms describing different types of mortgage insurance fees.
- Options for eliminating your mortgage insurance fees include: paying off at least 20% of your loan, or if you have an FHA loan, refinancing into a different loan product altogether.
- Homeowners insurance is completely separate from mortgage insurance and refers to insurance coverage for liabilities (such as someone getting injured on your property) as well as insurance coverage for hazards (such as damage caused by wind, hail, fire, lightning, falling objects, burglary).
- The specific type of hazard insurance policy you need can vary greatly depending on your location.
- When shopping around for insurance policies, you may want to do your research and take the time to understand exactly what is and what isn’t covered in each policy.