Mortgage Protection Insurance vs. PMI: What's the Difference?

Key takeaways

• PMI is usually required on conventional loans with less than 20% down. It protects the lender if you stop paying — it pays your family nothing.
• Mortgage protection insurance is life insurance that pays your beneficiary if you die, so they can pay off the mortgage or keep making payments.
• You can ask to cancel PMI once your balance reaches 80% of the home's original value, and it generally ends automatically at 78%. Mortgage protection is optional and stays with you if you move or refinance.

What is PMI?

Private mortgage insurance (PMI) is a policy your lender requires — and you pay for — when you put less than 20% down on a conventional loan. If you default, PMI reimburses the lender for part of its loss. It doesn't pay off your loan if you pass away or become disabled, and your family is not the beneficiary.

Under the federal Homeowners Protection Act, you can ask your lender to cancel PMI once your balance is scheduled to reach 80% of the home's original value, and it generally ends automatically when the balance is scheduled to reach 78% — as long as you're current on payments. FHA loans use a different charge called a mortgage insurance premium (MIP), and VA loans don't carry monthly mortgage insurance at all.

What is mortgage protection insurance?

Mortgage protection insurance (MPI) is life insurance chosen to match your mortgage balance and term. If you die while the policy is active, it pays a death benefit to the people you name. They can pay off the house, keep making payments, or use the money for other needs.

Many policies also include living-benefit riders that pay part of the benefit early if you're diagnosed with a qualifying critical, chronic or terminal illness. Some term policies offer a return-of-premium rider that refunds your base premiums if you outlive the term, for a higher price.

PMI vs. mortgage protection, side by side

Do you need mortgage protection?

Ask yourself one question: if your income stopped tomorrow, could your family keep making the house payment? If the answer is no, you have a gap worth closing.

A few situations where it's especially worth a look:

• You bought recently, so your balance is at its highest.
• Your household depends on one income.
• Your only life insurance is through work, which often ends when you leave the job.
• You have a VA loan, which has no mortgage insurance — and nothing that pays off the loan if you die.

Mortgage protection vs. a regular term life policy

Most mortgage protection sold today is term life insurance, sized and timed to your mortgage. The main thing to watch for is decreasing-term coverage sold through lenders, where the benefit shrinks as your balance does and is paid to the lender. A level-term policy you own keeps the same benefit for the whole term, pays your beneficiary, and stays with you if you sell or refinance.

That's why we usually recommend a level-term policy you own, matched to your mortgage — and then shop it across several carriers so you see the lowest price we can find for your health.

The bottom line

PMI protects the bank. Mortgage protection protects your family. If you have PMI, work toward 20% equity and ask to cancel it. If your family relies on your income to make the payment, compare mortgage protection options — it costs nothing to see what you'd pay.