What Is The Difference Between MIP, Mortgage Insurance, And Homeowner’s Insurance?
Mortgage Insurance to Protect the Lender
When a bank or other lender makes a loan they want to be sure that they get paid. To encourage lenders to make loans, two large government backed institutions, Fannie Mae and Freddie Mac, guarantee the banks loans. That is, if the borrower does not pay it back, Fannie Mae or Freddie Mac will. So, they are insuring the loan. That is called mortgage insurance. Who supplies the money to pay back those bad loans? Everyone else who gets a loan pays a little bit toward it in their monthly payment. It is referred to as MIP ( Mortgage Insurance Premium) in FHA loans, or PMI (Private Mortgage Insurance) in conventional loans. Buyers can usually drop mortgage insurance payments when they have 80% loan to value in their home. So, if you are getting a mortgage loan that is greater than 80% of the value of the home, you will have to pay monthly mortgage insurance along with mortgage loan payment.
Mortgage Insurance to Protect Against Death
Life insurance companies offer a product also called mortgage insurance. Its purpose is to pay off the mortgage on the home if a home owner dies before the loan is paid off. There are many different kinds of policies to accomplish this. One kind, probably the cheapest to purchase, is reducing term life insurance. With this product, as the balance on your mortgage 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 coincides with the balance on your mortgage, it is called mortgage insurance. It is optional, and is not usually part of your monthly house payment. It is an inexpensive way to protect your family from being unable to make that monthly mortgage payment if one or both of the borrowers passes away.
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 perils are: fire, water damage, wind, hail, snow, and possibly earthquake and flood. Other things that may be covered by a homeowner's policy are owner's liability, theft, burglary, personal property coverage. When you buy a home, the lender wants to be named as an “additional name insured”, so that in the event there is a total loss the lender will be guaranteed that the home can be repaired, or that the loan will be paid off from the proceeds of the insurance. Lenders require this before they will approve your mortgage loan. It is most often 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 placing it in an escrow account; you can check with your lender to see if he allows that. You can reduce the amount of the premium by accepting a larger deductible; meaning the amount you must pay from your own funds before the insurance pays the claim.
The above explanations are generalities. Homeowners must read each policy carefully to understand specifically applies to their individual situations. Take the time to read your policies carefully.