Each mortgage payment includes 5 items. It is called "PITI + PMI". "P" stands for payment that reduces the Principal loan balance (This goes towards your equity). "I" stands for Interest that you pay to the lender for lending you the money to buy the house. "T" stands for Taxes to the county. "I" Stands for the Home owners Insurance. Finally, "PMI" stands for Private Mortgage Insurance.
Homeowners Insurance is a must if there is a mortgage on your house. It's the only financial protection for the policy holder's largest asset. It protects your home, your belongings inside and any losses due to a disaster. It's your personal liability that protects you … not the bank.
For example, if your house is damaged or destroyed, or if your valuables are stolen, you contact the insurance company and they will send out an appraiser who will assess the damage and provide you with an estimate of the cost to repair. If the loss is due to theft or vandalism, the appraiser will need a detailed list of the items stolen or damaged, their value and police reports filed due to the theft or vandalism.
On the other hand, Private Mortgage Insurance is extra insurance lenders require from most home buyers who obtain loans that are more than 80 percent of the homes value. Normally, buyers with less than 20 percent down on a home are required to pay PMI.
In the mortgage business, it protects the lender against loss if the borrower defaults on the loan and by enabling borrowers with less cash to have greater access to home ownership. Meaning, you can buy a home with a three to five percent down payment without waiting years to save up a large sum of money. However, if the lender is unable to recover costs after foreclosure and sale of the property, they receive 15 percent of what you did not pay at closing.