What You Should Know About Escrow, Mortgage Insurance & Homeowners Insurance

When purchasing your home, whether it’s your first, second, third, or so on, there are always new terms to learn or relearn, and that’s only to be expected. Let’s focus specifically on the following trifecta of terms – PMI, Homeowners Insurance, and Escrow – and help you gain a better understanding of the three.

What is Personal Mortgage Insurance?

It’s no secret that the vast majority of people finance their homes through mortgages. And depending on how much money people put down toward the purchase of their home, they might be required to carry Personal Mortgage Insurance (PMI). But PMI is not the same as homeowners insurance, and it’s important to know the difference.

What is PMI?

Personal Mortgage Insurance (PMI) is a monthly insurance payment you’ll make if you put less than 20% down on your home. It protects your lender in the event you default (not repay) on your loan. It’s not an optional form of mortgage insurance, like some other mortgage insurance plans. The amount you’ll pay every month for your PMI depends on your lender and how much of a deposit you’ve put down on your home.

PMI vs. Homeowners Insurance

Homeowners insurance protects the home and its contents for both the borrower and the lender against qualifying events (such as fires or storms), while mortgage insurance solely protects the lender against borrower default.

What is Escrow?

Escrow is a crucial element of any mortgage. It is the process by which a third party mediates a real estate deal – holding money and property until the two sides agree that all the conditions have been met for a sale to close. After you close, your mortgage payment may still include money to an escrow account to help the borrower manage PMI, homeowners insurance, and annual property taxes. However, you may choose to manage some of those costs in other ways.

If I have PMI, should I refinance?

For those borrowers who carry PMI, they know it’s an extra amount of money they’d rather keep each month. And there are times you might be able to reduce the amount, such as if you refinance. With mortgage rates near historic lows, refinancing your mortgage could be a smart move. If your credit score has improved or your home equity has increased since the initial purchase of your home, by refinancing you may now have 20% equity in your home. And dropping your PMI might actually cost you substantially less than what you’re currently paying. With refinancing, you’ll definitely want to weigh the closing costs against your potential savings from the new loan terms and eliminating PMI.

We hope you have a clearer and more confident grasp on what PMI, Homeowners Insurance, and Escrow are. All three are common and important to countless borrowers across the country, which is why we want more folks to understand them better. After all, the more knowledgeable you are, the more confident you can be in making the right decision for you.