Homeowners Insurance vs. Mortgage Insurance: What’s the Difference?

byetak

24 Apr, 2025

If you’re buying a home, you’ve probably come across two types of insurance that sound similar but serve very different purposes: homeowners insurance and mortgage insurance.

At first glance, they can be confusing—both are tied to your home, both involve monthly payments, and both are often required. But don’t worry, this post will walk you through what each one is, who they protect, how much they cost, and why you might need them.

Let’s clear it up once and for all: What’s the difference between homeowners insurance and mortgage insurance?

What is Homeowners Insurance?

Homeowners insurance (also called home insurance) is a policy that protects you, the homeowner, from financial loss if something happens to your home or belongings. It also offers liability protection in case someone gets hurt on your property.

Most standard homeowners insurance policies cover:

Dwelling coverage: Repairs or rebuilds your home if it’s damaged by events like fire, storms, or vandalism.
Personal property: Covers furniture, electronics, clothing, and other personal belongings.
Liability protection: Helps pay legal and medical costs if someone is injured on your property.
Additional living expenses: Covers hotel and food costs if you can’t live in your home due to a covered loss.

Who does it protect?
Homeowners insurance protects you, the homeowner—not the mortgage lender.

Is it required?
Yes, if you have a mortgage, your lender will usually require you to carry homeowners insurance. Even if you own your home outright, it’s still a smart idea to keep a policy.

What is Mortgage Insurance?

Mortgage insurance protects your lender, not you. It’s designed to reduce the lender’s risk if you stop making mortgage payments.

There are two main types:

Private Mortgage Insurance (PMI): For conventional loans when your down payment is less than 20%.
Mortgage Insurance Premium (MIP): Required on most FHA loans, regardless of your down payment size.

Who does it protect?
Mortgage insurance protects the lender, not the homeowner.

Is it required?
Yes, in certain situations. You might need to pay mortgage insurance if:

You’re putting less than 20% down on a conventional loan.
You have an FHA loan.
You’re refinancing with a high loan-to-value (LTV) ratio.

Key Differences at a Glance

Real-Life Example

Let’s say a fire damages your home. If you have homeowners insurance, your policy can help you repair the home, replace damaged belongings, and even cover hotel stays while repairs are being made.

Now let’s say you lose your job and fall behind on mortgage payments. If you have mortgage insurance, it doesn’t help you pay your mortgage or keep your home. Instead, it helps your lender recover some of the money if they have to foreclose on your house.

How Much Do They Cost?

Homeowners Insurance Cost:

The average cost of homeowners insurance in the U.S. is around $1,500 per year, but it varies depending on:

Where you live
The value of your home
Your coverage limits
Your deductible
Your credit score and claims history

You can usually pay it monthly as part of your mortgage escrow account.

Mortgage Insurance Cost:

PMI typically costs 0.5% to 1.5% of your original loan amount per year. So if you borrow $300,000, PMI could cost you $1,500 to $4,500 annually.
FHA MIP costs:
- An upfront premium: 1.75% of the loan amount (can be rolled into the loan).
- An annual premium: 0.45% to 1.05% depending on loan size and term.

Can You Cancel It?

Homeowners Insurance: Yes, but not recommended unless you’re selling the home or replacing it with another policy. Lenders will likely require you to maintain coverage if you have a mortgage.
PMI: You can request cancellation once you reach 20% equity in your home. Your lender is required to automatically remove PMI once you reach 22% equity (based on original purchase price).
FHA MIP: Harder to cancel. For most FHA loans made after 2013, you’ll have to refinance into a conventional loan to get rid of MIP—unless you put down at least 10%, in which case MIP drops off after 11 years.

Why Do Lenders Require These?

Homeowners insurance is required because your home is collateral for the loan. If it burns down or is damaged, the lender wants to make sure it can be repaired.
Mortgage insurance is required to protect the lender in case you default on a risky loan (like one with a low down payment).

Is Either Optional?

If you own your home outright, you’re not legally required to have homeowners insurance—but skipping it could be a major risk.
If you put down 20% or more on a conventional loan, you can avoid mortgage insurance altogether.

Final Thoughts

Both homeowners insurance and mortgage insurance come into play when you buy a home, but they serve completely different purposes.

Homeowners insurance protects your investment, your stuff, and your financial future. It gives you peace of mind that if something goes wrong—like a fire, storm, or burglary—you won’t be financially devastated.

Mortgage insurance, on the other hand, protects your lender. It doesn't offer any direct benefits to you, but it can help you qualify for a loan with a smaller down payment and start building equity sooner.

Bottom line:

You need both when buying a home with less than 20% down.
You want homeowners insurance to protect yourself.
You’ll have to deal with mortgage insurance to satisfy your lender—but there are ways to eliminate it over time.

Tips for Homebuyers

Shop around for homeowners insurance. Prices can vary widely between insurers.
Raise your deductible to lower your premium. Just make sure you can afford it in case of a claim.
Ask your lender about PMI alternatives. Some lenders offer “lender-paid PMI” or second loan options.
Monitor your home equity. Once you reach 20%, request to cancel PMI.
Consider refinancing. If you're stuck with FHA MIP, refinancing into a conventional loan might eliminate it.

Still confused? That’s normal—insurance isn’t always easy to understand. But now that you know the difference between homeowners insurance and mortgage insurance, you’re better prepared to navigate the home-buying process like a pro.

Got questions about insurance types or need help picking the right policy? Drop them in the comments or send us a message—we’re here to help.