What's the Difference Between PMI and Mortgage Protection Insurance?

Private mortgage insurance protects the lender while mortgage insurance protection is for the borrower.

By , Attorney

Many homeowners are confused about the difference between private mortgage insurance (PMI) and mortgage protection insurance. These two kinds of insurance are very different, and it's important to understand the distinction between them.

It's not uncommon for homeowners to mistakenly think that PMI will cover their mortgage payments if they lose their job, become disabled, or die. But this belief isn't correct. PMI is designed to protect the lender, not the homeowner.

On the other hand, mortgage protection insurance will cover your mortgage payments if you lose your job or become disabled, or it will pay off the mortgage when you die.

What Is Private Mortgage Insurance (PMI)?

PMI will reimburse the mortgage lender if you default on your loan and your house isn't worth enough to repay the debt in full through a foreclosure sale. PMI has nothing to do with job loss, disability, or death, and it won't pay your mortgage if one of these things happens to you.

When Lenders Require PMI

With a conventional loan, if your down payment on your home is less than 20%, your lender will most likely require you to get PMI.

How to Get Rid of PMI

Once your mortgage balance reaches 80% of the home's value at the time you bought it, contact your mortgage servicer and let them know that you would like to discontinue the PMI premiums. Under federal law, a lender must inform you at closing how many years and months it will take for you to reach that 80% level so you can cancel PMI. Even if you don't request PMI cancellation, the lender must automatically cancel it once the balance gets to 78%. (12 U.S.C. § 4901).

How Much PMI Costs

The cost of PMI varies but is usually around one-half of 1% of the loan amount. So, it's well worth the effort to get rid of it as soon as you can, if you can. Also, keep in mind that mistakes often happen, and the servicer might not remember to cancel PMI once your loan balance gets to 78% without you reminding them.

What Is Mortgage Protection Insurance (MPI)?

Mortgage protection insurance (MPI), unlike PMI, protects you as a borrower. This insurance typically covers your mortgage payment for a certain amount of time if you lose your job or become disabled, or it pays it off when you die.

Lenders Don't Require MPI

While many lenders require PMI when a borrower's down payment is less than 20%, MPI is voluntary.

Should I Purchase MPI?

Again, unlike PMI, this type of insurance is purely voluntary. If you're in good health, relatively secure in your job, have no unusual lifestyle risks, and are adequately otherwise insured—for example, you have life insurance—you might not want or need to purchase this type of insurance.

But if you think that your particular circumstances or risk factors could warrant getting this type of insurance, consider contacting an insurance agent.

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