Home insurance vs. mortgage insurance: What’s the difference and do you need both?

Buying a home is a big milestone and for many it comes with an equally big question: “Do I need both home insurance and mortgage insurance?” It’s one of the most common points of confusion among new homeowners.

The short answer is that home insurance and mortgage insurance are not the same thing, and in many cases, you may need both types of insurance when buying a house. Understanding what each one covers can help you make smart decisions, avoid unnecessary costs and protect your investment.

In this guide, we’ll break down the difference between mortgage insurance and homeowners' insurance, explain what they each cover and help you decide what’s right for your situation.

What is home insurance?

Home insurance, also known as homeowners insurance, is designed to protect you and your investment. It helps cover the cost of repairs or replacement if your home is damaged by events like fire, theft, wind or certain types of water damage. It also offers liability coverage in case someone is injured on your property. You can expect your home insurance to cover:

• Dwelling coverage – Helps pay to repair or rebuild your home.
• Personal property – Covers personal belongings like furniture, clothing, and electronics.
• Liability protection – Covers legal and medical costs if someone is injured on your property.
• Loss of use – Covers temporary living expenses if your home becomes uninhabitable.

Home insurance is required by most mortgage lenders, but even if you’ve paid off your home, it remains a critical part of protecting your assets.

What is mortgage insurance?

Mortgage insurance is often misunderstood. It doesn’t protect your home or belongings; it protects your lender in case you stop making mortgage payments. If you default on your loan, mortgage insurance helps the lender recover their financial loss.

There are a few types of mortgage insurance, but the most common is Private Mortgage Insurance (PMI). Most lenders require PMI if your down payment is less than 20%. In short:

• Mortgage insurance doesn’t cover damage to your home.
• It won’t help you pay your mortgage if you lose your job.
• It’s primarily there to reduce lender risk.

In other words, this coverage doesn’t directly benefit you, but it’s often necessary to secure a loan with a lower down payment.

Key differences between home and mortgage insurance

These two types of insurance sound similar, so it can be difficult to remember which is which. Here’s a simplified comparison to help you keep them straight.

Who it protects

• Home insurance protects you, the homeowner, by covering your property, belongings and liability risks.
• Mortgage insurance protects your lender by reducing their financial risk if you stop making mortgage payments.

What it covers

• Home insurance covers your home’s structure, your personal belongings and personal liability if someone is injured on your property.
• Mortgage insurance only covers the lender’s risk by helping them recover losses if you default on your loan.

Who requires it

• Home insurance is typically required by your mortgage lender, but it’s beneficial for all homeowners to carry, even if it’s not mandated.
• Mortgage insurance is required by most lenders if your down payment is less than 20%.

Who benefits

• Home insurance benefits you by paying to repair or replace your home or belongings after a covered loss.
• Mortgage insurance benefits the lender, not you, by protecting them if you fail to repay your loan.

Can it be canceled?

• Home insurance can be canceled, though your lender may require you to maintain coverage for the life of the loan.
• Mortgage insurance can typically be canceled once you’ve reached at least 20% equity in your home.

Do I need both home and mortgage insurance?

Many homeowners assume that they need either home insurance or mortgage insurance, but not both – but they serve two very different purposes. One protects your property and personal belongings, the other protects your lender if you stop making payments on your loan. Depending on your financial situation and how much equity you have in your home, you may need one, both or neither.

You’re a first-time homebuyer with a low down payment

If your down payment is less than 20%, your lender will almost certainly require you to carry mortgage insurance. It’s a way for them to reduce their risk if you stop making payments. You’ll also need home insurance to protect your home, your belongings and yourself from liability.

More than a requirement, home insurance is essential at this stage of building equity. A major loss early in homeownership – like fire or water damage – could set you back financially for years.

You’ve refinanced and now have more than 20% equity

Once you’ve built enough equity, typically at least 20% of your home’s value, you may be eligible to cancel private mortgage insurance (PMI). That can lower your monthly payment and save you money in the long run.

However, home insurance will still be required by your lender. And for good reason. Your home is still a major financial asset, and coverage protects you if something goes wrong.

You own your home outright

If you’ve paid off your mortgage, you’re no longer required to carry mortgage insurance and you won’t have a lender to require home insurance, either. But that doesn’t mean you should drop your coverage.

Without home insurance, you’d be responsible for the full cost of rebuilding after a fire, replacing stolen property or covering legal expenses if someone is injured on your property. Even if you no longer owe money on your home, protecting it still matters.

When to update or review your policies

It’s a good idea to review your coverage whenever your circumstances change to be sure that you’re still getting the right coverage at the right price. Even if nothing has changed for you, it’s wise to review your policy around renewal time in case something has changed with your insurance company or your local laws. Generally speaking, we suggest reviewing your coverage during these key times:

• When buying or refinancing your home – You’ll likely be required to carry home insurance and possibly mortgage insurance depending on your loan and down payment. Make sure your coverage limits match your home’s value.
• After completing major renovations – Upgrades like new roofs, room additions, kitchen remodels or basement finishes can increase the value of your home. You’ll want to update your policy so your new space is fully protected.
• When your personal belongings increase in value – If you’ve bought new furniture, electronics or high-value items, your personal property coverage limits might not be enough. Updating your personal property coverage can help cover your personal belongings after a loss.
• When you reach 20% equity and want to cancel PMI – Once you’ve paid down enough of your loan, you may be eligible to remove mortgage insurance and lower your monthly payment. But cancellation isn’t automatic, you’ll need to contact your lender and possibly provide a home appraisal.
• If your premium goes up or you want better protection – A rate hike is a good reason to re-shop your policy or explore discounts. It’s also an opportunity to check for any coverage gaps or adjust your coverage limits for peace of mind.

Working with a licensed insurance advisor can make coverage decisions a lot less overwhelming. An advisor can walk you through different policies, explain what’s actually covered (and what’s not) and help you adjust your coverage as your life changes. At VIU by HUB, our advisors aren’t tied to one insurance company. They compare options across carriers to help you find the right fit for your home, your needs and your budget.

Knowing the difference between mortgage insurance and home insurance is key to making sure that you have, and maintain, the right coverage for your life. Not sure if your current coverage is the right fit? The VIU by HUB Advisory Team is always available to explain your current coverage and help you compare your options so you can protect your home with confidence.