A closing disclosure lists several things with "insurance" in the name, and a first-time buyer reasonably assumes they are variations on a theme. They are not. They protect different parties, against different risks, on different timelines, and only one of them protects you against the house burning down.
The three at a glance
| Protects | Against | Paid | |
|---|---|---|---|
| Homeowners insurance | You, and your lender | Future physical damage and liability | Ongoing, each term |
| Lender's title insurance | The lender only | Title defects that existed before you bought | Once, at closing |
| Owner's title insurance | You | Title defects that existed before you bought | Once, at closing |
| Private mortgage insurance | The lender only | Your default on the loan | Monthly, cancellable |
The pattern worth holding onto: homeowners insurance looks forward, title insurance looks backward, and mortgage insurance is not about the property at all.
Homeowners insurance
This is the property and casualty policy. It covers the dwelling, other structures, personal property, loss of use and liability against perils occurring after the policy starts. What it covers and excludes is set out in what homeowners insurance covers.
Your lender requires it and appears on the policy through the mortgagee clause, which is why claim checks for structural damage often name the lender too. But you are the named insured; the coverage is yours, and the lender's interest rides along.
It is normally paid through an escrow account with your mortgage payment, and if it lapses the servicer can buy coverage on your behalf. See escrow, lender requirements and force-placed insurance.
It renews. It can be non-renewed. It changes price. None of that is true of title insurance.
Title insurance
Title insurance covers defects in the ownership history of the property, not the building. Before issuing a policy, the title company searches public records to identify liens, claims and encumbrances, and the policy responds to what that search missed.
Typical covered problems:
- Undisclosed liens, including unpaid taxes and contractor liens
- A prior owner's heir with a claim to the property
- Forged or fraudulent documents in the chain of title
- Recording errors and improperly executed deeds
- Undisclosed easements affecting use of the land
- Boundary and survey disputes, depending on the policy and endorsements
Two distinct policies exist and the difference is important.
The lender's policy, sometimes called the loan policy, is required by essentially every mortgage lender. It protects the lender. Its amount is generally tied to the loan balance and reduces as the loan is paid down, and it ends when the mortgage is paid off. You pay for it. It protects the bank.
The owner's policy protects you. It is generally written for the property's value at purchase and continues for as long as you or your heirs hold an interest. In most states it is optional, though the CFPB and state regulators encourage buyers to consider it.
The gap between them is the thing to understand. If a title claim surfaces, the lender's policy makes the lender whole. It contributes nothing to your down payment, your equity or your legal defense. Whether an owner's policy is worth its one-time premium is a real question, but it should be an answered question rather than an assumed one.
Two practical notes. First, regional custom varies on who pays for the owner's policy; in some areas the seller customarily buys it for the buyer. Second, buying both policies together often attracts a simultaneous issue discount, and the way title charges appear on the Loan Estimate and Closing Disclosure can differ from the title company's own quote, so it is worth asking directly.
Title insurance is regulated by the states, and in some states rates are set or filed rather than freely negotiated. Your state's insurance regulator is the authority on how it works where you are buying.
Private mortgage insurance
PMI is not property insurance in any sense. It is credit protection for the lender, generally required on conventional loans where the down payment is under 20 percent. If you default and the foreclosure sale does not cover the loan balance, PMI reimburses the lender.
You pay it. It protects the lender. It builds no equity and pays you nothing.
The one piece of consumer-side mechanics worth knowing: under the federal Homeowners Protection Act, borrower-paid PMI on most conventional loans can generally be cancelled on request once the loan reaches a set loan-to-value threshold, and terminates automatically at a lower one, subject to conditions including payment history. The specifics, including which loans are covered and what the servicer requires, are set out by the CFPB and by your servicer.
Government-backed loans use different programs with different rules. FHA mortgage insurance premiums, in particular, follow their own cancellation terms, which are frequently less generous than conventional PMI. Ask your lender which product your loan carries.
Mortgage protection insurance is a different product again, usually a life or disability policy that pays the mortgage if you die or cannot work. It is optional, it is sold separately, and it should not be confused with PMI despite the similar name.
What each one does not do
- Homeowners insurance does not cover flood, earthquake, maintenance, or title defects. See flood insurance and the NFIP and earthquake insurance explained.
- Title insurance does not cover physical damage, or defects that arise after you buy, such as a lien you create yourself.
- PMI does not cover the property, does not help you, and does not reduce what you owe.
- None of them cover mechanical breakdown of appliances and systems. That is a service contract, described in home warranty vs home insurance.
Where each one shows up in a purchase
The buying sequence is set out in full in buying your first home: the insurance timeline. In short:
- Under contract: the title search begins, and you start shopping for homeowners coverage. Do this early rather than in closing week, particularly during storm season. See binding restrictions before a storm.
- Before closing: homeowners coverage must be bound and evidenced to the lender, and the title commitment is issued. Read the commitment's exceptions; that is the list of things the policy will not cover.
- At closing: title premiums are paid once. The first year of homeowners premium is often paid at closing too, with escrow funding thereafter.
- After closing: homeowners renews annually and should be reviewed as your rebuild cost changes, per how much dwelling coverage do you need. PMI should be tracked for cancellation. Title insurance requires nothing further.
Coverage terms, whether an owner's title policy is customary or who pays for it, title rate regulation, PMI cancellation rules and lender requirements all vary by insurer, by lender, by loan program and by state, and the policy documents, loan documents and applicable law control. For your own situation, speak with a licensed agent, your lender, a real estate attorney or your state's Department of Insurance. You can also request home insurance quotes and get connected with licensed providers in your area.