Understanding how each insurance type works can help ensure that you purchase the right protection for your property.

Key takeaways:

  • Homeowners insurance protects the house and its contents
  • Mortgage insurance protects the lender
  • You’ll probably need both insurance types when buying a home
  • Learning about both helps you understand your coverage options

Purchasing a home is an exciting time in your life, but it can also be overwhelming. You’ll have all kinds of documents to fill out before finalizing your agreement, and then you have to worry about insurance and other essentials before you take possession.

You might hear the terms mortgage insurance and homeowners insurance come up at this time, and understanding what each of them means is vital. These two insurance types aren’t the same, and you’ll probably need both before any lender will approve your transaction.

Confused yet? Don’t worry. Just keep reading to learn everything you need to know about mortgage insurance, homeowners insurance, and the differences between them.

Mortgage insurance

Mortgage insurance safeguards the lender if you cannot make your monthly mortgage payments. It doesn’t offer any protection for your property or belongings but acts as a way for your mortgage provider to recoup some losses if you can’t afford to pay the money you owe them.

Some lenders require borrowers to take out mortgage insurance when their down payment is less than 20% of the purchase price. This condition is often seen as necessary because the amount left on the mortgage will be significant, and payments will continue for 20 years or more. Lenders need to protect themselves, so they stipulate the need for mortgage insurance protection in these cases before approving a loan.

It’s worth noting, however, that not every lender requires mortgage insurance. You’ll want to speak with your provider before you sign any documentation to find out what they require because avoiding mortgage insurance can save you money. You can even negotiate mortgage insurance requirements if you’re considering quotes from multiple lenders during the home-buying process.

Remember: a mortgage insurance policy doesn’t protect you at all. The coverage is 100% for your lender. You just have to pay the premiums. So if you can negotiate your way out of a mortgage insurance requirement, it can definitely be to your advantage to do so.

Homeowners insurance

Homeowners insurance, on the other hand, is something you won’t want to do without. Unlike mortgage insurance, a homeowners policy protects your home and its contents against unforeseen loss or damage. It can also protect you from lawsuit payouts if someone suffers an injury while on your property. So it’s a crucial type of insurance for every homeowner to have.

Home insurance policies typically cover your home’s structure, your personal belongings, and any living expenses incurred if your home becomes temporarily uninhabitable due to damage. It can also pay for lawsuits relating to injuries you, your family, or your pets may cause and cover medical costs if someone is hurt at your house.

Most home insurance policies do have limitations, however, which exclude damage caused by certain natural disasters. For example, your policy might not cover damage from an earthquake, flood, or major storm if they’re common occurrences in your area. 

In New York State, a basic homeowners policy typically covers damage from fire, lighting, smoke, wind, and hail but won’t protect you from financial losses associated with flooding or earthquakes. You’ll need separate insurance through the National Flood Insurance Program or a private company that offers flood protection. Some insurers offer separate earthquake policies in New York, as well.

Your homeowners policy will have a deductible that you’ll be required to pay before your coverage kicks in. Monthly premiums are lower on policies with high deductibles, but such policies also mean that you’ll have to pay more out-of-pocket when you file a claim. There are sometimes special deductibles for windstorm or hurricane damage equal to 1%-5% of the home’s value, as well. 

Make sure you understand all of the stipulations in your policy before signing any paperwork. You want to avoid ending up in a situation where you believe you have insurance coverage, only to learn later that your policy is different than you thought.

Are mortgage and homeowners insurance necessary?

You might be wondering if both insurance types are mandatory when buying a home. While it does depend on the lender, there’s an extremely high chance that you’ll need mortgage and homeowners insurance in order to secure a loan. 

Lenders view loans with less than 20% down as risky, so they usually want some protection in case of default. The good news is that you can usually cancel your mortgage insurance once you pay off a certain percentage of your balance, so check with your lender regarding their rules.

Most lenders also require their borrowers to invest in homeowners insurance because buyers are more likely to stop making payments if a property is damaged to the point it’s no longer habitable. The expenses associated with repairing a significantly damaged home could also put the buyer under financial duress and prevent them from keeping up with their payments. 

That said, homeowners insurance is highly recommended for all buyers, even if a lender doesn’t require it. And it’s a good idea to keep up with the premiums even after you pay off your mortgage. Why? Because homeowners insurance protects you from all types of unforeseen circumstances and could keep a roof over your head if the damage makes your house unlivable. The protection from lawsuits is icing on the cake. 

In short, you’ll likely need both types of insurance when you buy a home. So it makes sense to shop around and find coverage that meets your needs at a price you can afford. 

Get the insurance coverage you need

Home insurance premiums can vary significantly, so it’s best to get quotes from several different insurers before making a decision. The location, age, condition, and value of your home will influence your rates, as will your credit score and deductible, so keep those factors in mind as you search. 

NICRIS Insurance offers home insurance policies in New York State. We’ll sit down with you and present a free, personalized review of your options, ensuring that you have a policy that works with your budget and requirements as a homeowner. Contact NICRIS Insurance today to book an appointment with our expert team.