Homeowners Insurance vs. PMI

hand over a house

When embarking on your homeownership journey, you may be inundated with extensive home-buying lingo. As exciting and confusing as buying a home is, the exorbitant amount of terms thrown your way can quickly leave you overwhelmed. Two such terms are “Homeowners insurance” and “Private mortgage insurance”. At face value, they may seem the same, but they couldn’t be more disparate.

Your home, your most valuable asset, requires proper protection. And that is what insurance offers. However, homeowners insurance and private mortgage insurance differ in many aspects, including which party it protects. So, here’s a deep dive into each type of insurance.

Homeowners Insurance

Homeowners insurance, sometimes called home insurance, safeguards your property - including your home’s structure, personal belongings, liabilities, and additional structures, from financially catastrophic losses caused by unforeseen events such as fire, burglary, etc. It also provides financial protection against lawsuits if someone gets hurt on your property.

Typically, lenders require homeowners insurance before allowing you to take out a mortgage to ensure the asset is financially protected. Homeowners insurance is meant to protect you rather than your lenders, so you must have it in place if you want to shield your residence and everything in it.

What does Homeowners Insurance Cover?

A standard home insurance policy may provide coverage for the following:

  • Home’s structure: Covers the structure of your home if it is damaged by an event covered by the policy.
  • Personal property: Protects your possessions in case they are stolen or damaged both on and off your property.
  • Liability: Covers liability in lawsuits for injuries or property damage that you, your family, and pets cause.
  • Medical payments: If somebody gets injured on your property, home insurance pays for their medical expenses.
  • Loss-of-use: If your home turns uninhabitable due to a covered loss, it pays you to live elsewhere as your home is being repaired.

In general, covered events entail damage or loss to your property due to:

  • Fire
  • Explosions
  • Hail
  • Lightning strikes
  • Theft
  • Vandalism
  • Windstorms

What does Homeowners Insurance not Cover?

There are certain events that a standard homeowners insurance policy doesn’t cover. You will have to add further coverage to your policy or get a separate policy to cover these types of events. Typically, damage caused by the following events are not covered:

  • Earthquakes and landslides
  • Flooding
  • Sinkholes
  • Mold
  • Anything that can be associated with the lack of maintenance and neglect of your property
  • Sewer or drain backup damage
  • Power failures

How does Homeowners Insurance Work?

In general, you’ll pay home insurance as a part of your monthly mortgage payments. Home loan lenders will pay the premiums on your behalf and then incorporate that cost into your monthly repayments. Your home loan lender might create a third-party account to pay your home insurance premiums and property taxes. This helps to guarantee that you have sufficient funds to cover both of these significant expenses on time. The bank usually collects this money as part of your monthly mortgage payments, puts it in the third-party account, and then pays your home insurance provider on your behalf.

How much does Homeowners Insurance Cost?

The cost of homeowners insurance relies on various factors such as your claim history, the level of coverage you purchased, your home’s value, age, location and materials, and how the house is occupied. Furthermore, insurers may take building materials and a number of other potential risks into consideration while calculating your insurance premium.

Do you need Homeowners Insurance?

Yes. Most lenders make home insurance mandatory if you take out a mortgage to buy a home. Regardless of whether it’s necessary, having homeowners insurance can be an excellent financial decision when considering the high cost of replacing homes and costly lawsuits. Monthly premiums will seem far less when you compare it to the cost of rebuilding your house or replacing all your precious belongings in case of a covered catastrophic event or if you’re sued by a guest who got injured.

So, we strongly recommend that you purchase a homeowners insurance policy regardless if it’s required or not. After you pay off your mortgage, the lenders may not require you to carry home insurance. However, it is now up to you to protect your investment, and homeowners insurance provides that protection.

Private Mortgage Insurance

Private mortgage insurance is a sort of mortgage insurance required by some lenders when your down payment is lower than 20% of the home’s purchase price. Lenders require high-risk borrowers to get private mortgage insurance to secure what is their investment as well.

Who does Private Mortgage Insurance Protect?

Unlike homeowners insurance that protects your home and you as the homebuyer, private mortgage insurance protects the lender should you fail to pay back your loan.

How does Private Mortgage Insurance Work?

Typically, you’ll pay for private mortgage insurance in two ways: in a lump sum upfront or in parts over time through monthly payments.

How Much is Private Mortgage Insurance?

Your PMI premiums depend on numerous factors, such as LVR and your credit score.

Learn more about Private Mortgage Insurance

In Conclusion

Both homeowners insurance and private mortgage insurance are two disparate parts of the homeownership journey. Understanding what they are and the ways they work can leave you better equipped to navigate through the home loan application process.

You can always learn more about these kinds of financial products through your mortgage broker. Don’t have one? We are here to help! Book an appointment with one of our Nepali mortgage brokers at Capkon to obtain a free finance strategy session.

Author:

Kiran Thapa

Seema Lama

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