by Beth Dame, Regional Sales Director, Main Street America Insurance

From down payments and mortgage rates to insurance, there’s a lot to consider when buying a home. Two of the most common insurance types you’ll see throughout your search are mortgage insurance (PMI) and homeowners insurance — but what are they? Do you really need them, and are PMI and homeowners insurance the same thing? Read on to find out.

What is Homeowners Insurance?

Homeowners insurance is a standard policy set up when you purchase a home. Homeowners insurance is designed to protect you in the event of a covered loss, like a storm or break in. Depending on the coverage options you choose, your homeowners policy will pay to repair or replace damage to your home and personal property and protect you from liability if someone else is injured on your property.

But how does homeowners insurance work? Homeowners insurance is a policy you’ll purchase from your insurance carrier, such as Main Street America Insurance. You’ll work with an independent insurance agent to build a unique policy based on things like:

• Where you live
• Your home’s value
• The materials used to build your home
• The number (and cost) of covered items in your home
• The deductibles and coverage limits you need

What is Private Mortgage Insurance?

When looking at mortgage insurance vs homeowners insurance, the most important thing to know is that private mortgage insurance (PMI) is designed to protect your mortgage lender. In some cases, when applying for a mortgage your lender will require mortgage insurance. This ensures that your bank is protected in the event that you can’t make your mortgage payments or the home goes into foreclosure.

The more risk associated with your loan, the more likely it will be that your lender will require mortgage insurance. Factors your lender will consider include:

• Your credit score
• Your credit history
• The amount of your down payment
• The amount and stability of your income

How PMI Works

Private mortgage insurance premiums are typically a percentage (about 1-2%) of your home’s cost. PMI can be paid upfront if you prefer, but is often rolled into your mortgage like gap insurance for a car. Private insurance companies also provide PMI but, unlike homeowners insurance, your lender will arrange the policy on your behalf.

Do You Need Mortgage Insurance and Homeowners Insurance?

The short answer is yes.

While homeowners insurance is not required in all states, it’s good coverage to have in the event of an emergency. For example, say someone breaks into your home while you’re away for the holidays. The burglar damages the front door and the frame while entering your home and steals $5,000 worth of your belongings. With the right coverage in place, your homeowners policy could be the difference between quickly and affordably restoring your home and thousands of dollars in unexpected costs for your family. Your lender may also require homeowners insurance as a contingency of your loan.

Similarly, not every borrower will need private mortgage insurance. However, if your lender deems you a higher risk, it could be the difference between buying the home of your dreams and getting denied a mortgage altogether. While PMI doesn’t protect you directly, it’s an important coverage lenders often use to determine your eligibility to buy a home.

How Do You Avoid Paying PMI?

The good news is there are ways to avoid PMI or remove it from your mortgage later. The most important things you can do to avoid PMI are ensuring your credit profile is the best it can be before applying for a mortgage, and planning to pay 20% or more down. Borrowers using government programs, like the first time homebuyers program, are generally required to keep PMI for the life of the loan. However, conventional mortgages can be changed if you meet the right requirements.

Request Cancellation

Once you’ve paid off 20 percent or more of your loan, assuming you are in good standing and have a good payment history, you can submit a request to your lender to have PMI cancelled. Your lender may require evidence of your home’s value and other factors before agreeing to cancel your policy.

Automatic Cancellation

Mortgage lenders are required to automatically cancel your PMI policy once the principal balance on your mortgage drops below 78% of your home’s original value.

Final Termination

Regardless of your principal balance or the value of your home, once you’ve paid half of the original term agreement (for example, 15 years on a 30 year loan) your lender is required to remove PMI.

Refinance

As you work to pay off your mortgage and build equity in your home, you may find that you meet your lender’s requirements for a PMI-free loan. If that’s the case, you can refinance your home and have the PMI policy removed.