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New home buyersFirst-time home buyers have to learn a lot of real estate and finance vocabulary in a short amount of time. For example, many people have heard of mortgage insurance but don’t quite know what it is and how it differs from homeowner’s insurance. They sound alike but are really two distinctly separate things.

What Is Mortgage Insurance?

Most people don’t buy their homes with a suitcase full of cash. We rely on lenders to pay for the bulk of the cost upfront for us and we pay the lender back in monthly installments with interest. Until you’ve paid the home off, it essentially belongs to the bank, even though you take over responsibility for it. This puts the bank in a risky situation. To mitigate that risk, many lenders will require you put in a down payment which is calculated as a percentage of the total cost of the home. If you can’t afford to put in at least 20% upfront, the lender may require you to take out mortgage insurance. Mortgage insurance protects the lender if you default on the loan. If you lose your job and can’t make the payments anymore, your mortgage insurance will kick in.

What Is Homeowners Insurance?

Assuming that you keep making your mortgage payments, the banks never biggest risk is that something catastrophic happens to the house, like a fire. Homeowners insurance protects both the home buyer and the lender against loss or damages to the property. It can cover the structure of the house as well as the possessions inside the house. Anytime you have a mortgage you will be forced to take out a certain amount of hazard insurance on the home. Even if you own the house free and clear, you’ll always want to protect that investment with insurance. Your home is likely to be the most expensive thing you’ll ever own, so protecting it is vital to your future.

In short, mortgage insurance protects the lender in the event you can’t pay off your home while homeowner’s insurance protects you and your lender’s investment by insuring the physical structure and all of the things inside the home. Both are required when you have a mortgage in which you paid less than 20%. The lender may remove the requirement once certain conditions are met or you can choose to keep it in place as an added protection.

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