Mortgage Protection vs. PMI: What’s the Difference?
The short version
PMI (private mortgage insurance) protects your lender if you stop making payments. Mortgage protection is life insurance that pays your family if you die, so they can keep the house. They sound alike, but they do opposite jobs, and many homeowners have one without the other.
What PMI is
According to the Consumer Financial Protection Bureau, private mortgage insurance is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. It can also apply when you refinance a conventional loan with less than 20 percent equity.
The key point, in the CFPB’s words: “PMI protects the lender—not you—if you stop making payments on your loan.”
Government-backed loans work differently. FHA loans, for example, have their own mortgage insurance premiums. Either way, this kind of mortgage insurance exists to protect the lender.
When PMI goes away
Under federal rules, you can ask your servicer to cancel PMI once your principal balance is scheduled to reach 80 percent of your home’s original value, provided you meet requirements such as a good payment history. Your servicer must end it automatically when the balance is scheduled to reach 78 percent, as long as you’re current on payments.
What mortgage protection is
Mortgage protection is life insurance built around your home loan, usually term life with a coverage amount and length that match your mortgage. If you die during the term, the policy pays a lump sum to the beneficiaries you choose. Many policies also offer optional living-benefit riders that can pay part of the benefit early for a qualifying serious illness. For the full picture, see what mortgage protection insurance is.
Side by side
| PMI | Mortgage protection | |
|---|---|---|
| Who it protects | The lender | Your family |
| Who gets paid | The lender | The beneficiaries you choose |
| Required? | Often, on conventional loans with less than 20% down | No, it’s optional |
| What triggers a payment | The borrower stops paying the loan | The insured person dies during the term (or, with riders, a qualifying illness) |
| When it ends | Can be cancelled at 80% of original value; ends automatically at 78% | At the end of the term you choose, or if premiums stop |
| Who chooses it | Arranged through the loan | You choose the amount, term, and beneficiaries |
Can you have both?
Yes. They’re unrelated. Paying PMI doesn’t protect your family, and having mortgage protection doesn’t remove a PMI requirement. Plenty of homeowners pay PMI for a few years and keep a mortgage protection policy for the life of the loan.
The common mix-up
Many people see “mortgage insurance” on their loan paperwork and assume their family is covered. It isn’t. If the borrower dies, PMI doesn’t pay off the loan for the family. That gap is what mortgage protection is for.
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