Hazard Insurance Vs. Mortgage Insurance

While obtaining a hazard insurance is mandatory for availing a mortgage loan, a lender will draw insurance on the mortgage to protect his money. Apart from this point of distinction, this Buzzle article further does a hazard vs. mortgage insurance analysis to make their comparison clearer to you.
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Difference between hazard insurance and mortgage insurance
Did You Know?
If you are a student or a first-time homeowner who is seeking a mortgage loan, the lender will avail mortgage insurance, which will allow you to get the loan even if your down payment is lesser than 20% of the appraised market value of the house.

If you are a first-time home buyer, you may be confused about home insurance terms like hazard and mortgage insurance. Hazard insurance will prove to be advantageous for insuring your property and will be mandatory if you are availing a mortgage loan. On the other hand, mortgage insurance will be taken by the lender, but you will have to pay the premiums for the same. There are many strikingly different features that separate hazard from mortgage insurance. Here are a few parameters that will elaborate on the difference between the two.

Hazard Insurance

It is an offshoot of homeowner's insurance where the mortgage lender will make you avail an hazard insurance policy for the house if you are availing for a mortgage. It will protect the property against specific natural disasters like earthquake, hailstorms, floods, fire, hurricanes and even the damage rendered by thefts, terrorism and riots, which may not be covered by your homeowner's insurance. Availing this insurance will ensure that the value of the property used as collateral is upheld, as you will be compensated in case of a hazard. This means that your lender will be assured about the value of the property.

Mortgage Insurance

Lenders make mortgage insurance mandatory if you are availing a mortgage loan. It helps protect the value of your property, especially when the down payment is less than 20%. This way, even if you default on the payment, are ill or die, the insurance will cover the balance amount of your mortgage and the lender will not lose his money.

Hazard Insurance Mortgage Insurance
Cost
It may cost anywhere between .3 to 1% of the total loan amount on a yearly basis. The yearly cost is .19 to 1% of the total loan amount.
Impact on Credit Score
Nonpayment of your hazard insurance premiums will not affect your credit score. Nonpayment of mortgage payment and insurance cost will affect your credit score badly, as it will lead to foreclosure of your home.
Protection
It protects the interest of the lender as well as the homeowner. It only protects the interest of the lender, not the homeowner.
Safeguards Interest
It safeguards the interest of the borrower or owner against physical damage to property. It safeguards the interest of the lender against defaulting borrowers.
Selection of Insurance Company
Hazard insurance company is selected by the homeowner or borrower. The lender selects the insurance company in case of mortgage insurance.
Cost-dependent Factors
• Market value or replacement value insurance
• Deductible
• Value of house
• New or old property
• Credit score
• Value of house
• Down payment
• Value of loan amount
Premium Duration
Hazard insurance will have to be maintained throughout the term of the loan. The lender can eliminate the need for mortgage insurance once he has made a substantial down payment, i.e., about 80% of the total value of house.
Premium Payment
Insurance premium is paid by the homeowner. Insurance premium is paid by the borrower. Many times, the lender pays the premium, which is then added to the monthly mortgage payment of the borrower.
Policy Cancellation
It is highly advisable that you maintain this insurance even after your mortgage payment is through, as it will protect your house against hazards. According to information sourced from bankrate.com, owing to the law ruled by the Homeowner's Protection Act of 1998, the lender will have to automatically terminate your mortgage insurance when the loan balance is bound to reach 78% of your home's initial value based on the original amortization schedule.
Advantageous For
It comes with a dual benefit as it is advantageous to the lender as well as the homeowner, since the risk is mitigated for both. Mortgage insurance only works for the advantage of the lender, as the insurance allows him to take the risk.

Now that you know about the differences, don't forget to compare mortgage loan prices before you settle for one.

Our Verdict

Both are important types of home insurances. While mortgage insurance will give assurance to the lender, insuring your property against various hazards will prove beneficial for both you and your lender. Once you own about 22% of equity, remind your lender about discontinuing your mortgage insurance. On the other hand, speak to an insurance specialist to know about the various event-specific hazard policies that will not be covered by your general homeowner's insurance.
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Published: April 3, 2014
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