If you plan to take out a mortgage to buy a house, you’ll have to purchase homeowners insurance—but you may also need private mortgage insurance. People often confuse these two forms of insurance. Make sure you know the purpose of each and when you might need them.
What Is Homeowners Insurance?
If you take out a home loan, your lender will require you to purchase homeowners insurance. It can shield you from major financial losses if you file a claim related to a covered peril.
For example, if your roof gets damaged in a storm, your homeowners’ insurance policy will pay for repairs. Homeowners insurance can also pay for repairs or rebuilding costs if your house gets damaged or destroyed by a fire.
Your policy can pay to replace your belongings if your house is damaged or destroyed by a covered peril or if you’re a victim of theft. If someone visits your house and gets injured, and you’ve found liable, your homeowners’ insurance policy can cover medical bills, legal fees, and other associated costs.
What Is Private Mortgage Insurance?
Private mortgage insurance, or PMI, is designed to protect your lender in case you default on your mortgage. Even though you’ll have to pay private mortgage insurance premiums, it’s only for the benefit of your mortgage lender.
Your premiums will be a percentage of your loan amount. Private mortgage insurance may cost hundreds of dollars per month.
Do You Need to Have Homeowners Insurance and Private Mortgage Insurance?
If you take out a mortgage, you will have to purchase homeowners insurance, regardless of the amount of the loan. Lenders require it for all borrowers.
Once you pay off your mortgage, it will be up to you to decide whether or not to keep your homeowners’ insurance coverage. Even though you may not be required to keep it, you should.
If your house experiences major damage or you’re found liable for a serious accident and you don’t have homeowners insurance, you can suffer financial ruin. You may face bills for major repairs or you may be sued for medical bills related to an injury. You may have to use up your emergency fund, retirement investments, and children’s college savings to cover those costs.
You’ll most likely have to purchase PMI if you take out a conventional mortgage and put down less than 20%. You’ll have to continue to pay for PMI until you reach at least 20% equity. At that point, your lender may cancel it automatically, or you can ask to have it canceled.