Are mortgage insurance and homeowners insurance interchangeable?
No. Homeowners insurance protects your home and its contents. Mortgage insurance (also called private mortgage insurance or PMI) protects your mortgage lender in case you can’t meet your mortgage payments.
Do you always need mortgage insurance?
Typically, borrowers making a down payment of less than 20% of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans.
How can I avoid PMI?
One way to avoid paying PMI is to make a down payment that is equal to 20% of the purchase price of the home. Don’t try and avoid buying PMI if you are obligated to. In that case, your lender can buy it for you and then charge you, which may be more expensive than getting it yourself.
The Bottom Line
You will encounter both homeowners insurance and mortgage insurance as you work through the mortgage process, but they are very different types of insurance.
Homeowners insurance protects your home, its contents, and you in case of lawsuits. Mortgage insurance, also called PMI, protects your lender (the bank, for instance) in the event that you can’t meet your mortgage payments.
Most homeowners have homeowners insurance, because it can make good financial sense to protect yourself from unexpected costs. You will be required to purchase PMI—on top of your mortgage—if your