What is the difference between MIP, mortgage insurance, and homeowners insurance?

Mortgage insurance to protect the lender

When a bank or other lender makes a loan, they want to make sure they get paid. To encourage lenders to make loans, two large government-backed institutions, Fannie Mae and Freddie Mac, guarantee bank loans. That is, if the borrower does not pay it back, Fannie Mae or Freddie Mac will. Therefore, they are securing the loan. That’s called mortgage insurance. Who provides the money to pay off those bad loans? Everyone else who gets a loan pays a little in their monthly payment. It is known as MIP (Mortgage Insurance Premium) on FHA loans, or PMI (Private Mortgage Insurance) on conventional loans. Buyers can generally cancel mortgage insurance payments when they have a loan for 80% of the value of their home. Therefore, if you take out a mortgage loan that is more than 80% of the home’s value, you will need to pay monthly mortgage insurance along with your mortgage loan payment.

Mortgage insurance to protect against death

Life insurance companies offer a product also called mortgage insurance. Its purpose is to pay the mortgage on the house if the owner dies before the loan is paid off. There are many different types of policies to achieve this. One type, probably the cheapest, is reduced term life insurance. With this product, as your mortgage balance is reduced over time, the amount of life insurance coverage is also reduced. So at the end of your mortgage term there is no benefit. Since it roughly matches the balance on your mortgage, it is called mortgage insurance. It is optional and usually not part of the monthly house payment. It’s an inexpensive way to protect your family from not being able to make that monthly mortgage payment if one or both borrowers dies.

homeowners insurance

A homeowners policy is purchased to protect against damage that may occur to your home, as well as other perils that may cause financial hardship. Some of those hazards are: fire, water damage, wind, hail, snow, and possibly earthquakes and floods. Other things that may be covered by a homeowners policy are owner’s liability, theft, theft, and personal property coverage. When you buy a home, the lender wants to be named as an “additional name insured” so that in the event of a total loss, the lender will have a guarantee that the home can be repaired or that the loan will be paid off from insurance proceeds. Lenders require this before approving your home loan. It is usually paid monthly with your mortgage payment and held in an escrow account until it is paid annually. In some cases, you can pay the annual premium yourself without depositing it into an escrow account; You can check with your lender to see if they allow it. You can lower the premium amount by agreeing to a higher deductible; that is, the amount you must pay out of your own funds before the insurance will pay the claim.

The above explanations are generalities. Homeowners should read each policy carefully to understand that it specifically applies to their individual situations. Please take the time to read their policies carefully.