Homeowners Insurance vs. PMI

What’s the difference between homeowners insurance and PMI?

Two homeowner clients looking at a folder with a salesman on the street in a residential block.

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When you’re buying a home, there’s a dizzying array of terms thrown your way. Two important ones are homeowners insurance and private mortgage insurance (PMI). While they’re similar in that they can add to homeownership costs, they’re far from being the same thing.

In this guide, we’ll explore their differences, take a closer look at each one, and relate who they’re a good fit for.

Homeowners Insurance vs. PMI

Here’s a summary of the biggest differences between homeowners insurance and PMI:

Homeowners Insurance PMI
Protects your property Protects the mortgage lender in case of non-payment
Usually required for homeowners with mortgages Typically required on conventional loans with <20% down payment; always required on FHA loans
Average yearly cost of $1,211 Annual cost is a percentage of the original loan amount
No upfront fees May have initial mortgage insurance fee, depending on loan type

Who Is Protected?

Although homeowners insurance and PMI are discussed in the context of homeownership, they’re entirely separate matters. Home insurance is designed to insure your home and property so that, in case of damage from disasters like fire, burglary, and other covered perils, you’re not overwhelmed by costs. It also gives lenders peace of mind that your property is protected. On the other hand, PMI reduces your mortgage lender’s risk of losing money if you can’t meet payments. 

PMI is a protection for the lender, not the homeowner.

When They’re Required

Lenders typically require home insurance when you have a mortgage to ensure the asset is financially protected. On conventional loans, PMI is generally only needed when the buyer is providing less than 20% down on a mortgage, and usually only until you pay off 20% of your mortgage loan. However, on Federal Housing Association (FHA) mortgage loans, a mortgage insurance premium (MIP)—the equivalent of PMI—is always required.

How Much They Cost

Your homeowners insurance cost depends on various factors, including your claim history and your home’s value, age, and location, but the premium nationwide averages $1,211 per year. Important factors determining PMI premiums are your credit score and loan-to-value (LTV) ratio—the percent of your loan left to pay after your down payment. The latest average rates are as little as 0.58% to as much as 1.86% of the loan’s value. For MIP associated with FHA loans, the annual rate is 0.45% to 1.05%, depending on the LTV ratio and mortgage term. It also has an additional upfront MIP of 1.75% of the loan amount.

What Is Homeowners Insurance?

Homeowners insurance financially shields you from lawsuits if someone gets hurt on your property. It also insures your home and property from damage- or loss-related expenses caused by unforeseen events. This insurance is best for someone wanting to protect their house and belongings. 

What Does It Cover?

Your home insurance policy may include coverage for your:

  • Home’s structure
  • Personal belongings
  • Liability in lawsuits for injuries that you, your family members, and pets cause to other people
  • Medical expenses if someone is hurt in your home
  • Extra living expenses while your home is uninhabitable

What Doesn’t It Cover?

Typically excluded from standard homeowners insurance policies are damage caused by:

  • Earth movements like earthquakes and landslides
  • Flooding
  • Water from slow leaks and other neglected maintenance issues
  • Mold
  • Sewer or drain backups and sump pump overflow

How Does Homeowners Insurance Work?

Homeowners typically pay this insurance through their escrow account when making monthly mortgage payments. The lender then disburses payments when a bill is due. 

Do I Need Homeowners Insurance?

If you have a mortgage, then yes, you are most likely required to have homeowners insurance. Regardless of whether it’s needed, having home insurance can make good financial sense because of the high replacement cost of homes and costly lawsuits. Monthly premiums can be much less than what you would ever have to pay to rebuild your home or replace all your possessions in the event of a covered disaster, or if you’re sued because a visitor got hurt. 

If you’re obligated to purchase insurance but don’t, your lender can buy it for you and then charge you. This forced insurance can be more expensive than what you would buy on your own and may protect only the lender.

What Is PMI?

PMI is a kind of mortgage insurance used with conventional loans to protect the lender if you cannot make payments. When you have an FHA loan, this type of mortgage insurance is called a MIP. Mortgage insurance is relevant for those required to have it by their mortgage lender. 

How Does PMI Work?

PMI and MIP are added to your total monthly payment made to your lender, your closing costs, or both. FHA loans have the additional cost of an upfront MIP, which can be paid with closing costs or rolled into the mortgage amount. 

Can I Remove PMI?

The earliest you can cancel your PMI is when your principal balance falls to 80% of your home’s original value. This is defined by its contract sales price or appraised value at purchase (whichever is lower). You must have a history of on-time payments and be up-to-date with your bill when requesting cancellation. Be sure to check with your lender for lender-specific requirements. Depending on your LTV ratio when you took out your FHA loan, your loan terms may require you to maintain your MIP for 11 years, or the length of your mortgage. 

Do I Need PMI?

You’re typically required to get PMI when you supply a down payment of less than 20% of your home’s purchase price when taking out a conventional loan. It’s also typically required if you’re refinancing your home and the equity is less than 20% of its value. You may be able to forgo PMI with smaller loans, but you may pay a higher interest rate. For FHA loans, MIP is always required. 

Key Takeaways

  • Homeowners insurance protects your house and property, while mortgage insurance protects your lender.
  • Homeowners insurance is usually required if you have a loan, but mortgage insurance may not be, depending on your down payment amount and type of loan.
  • On FHA loans, private mortgage insurance (PMI) is referred to as a mortgage insurance premium (MIP).
  • Home insurance is a smart move for homeowners, but PMI is something to avoid when possible.