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

Short answer: “Mortgage insurance” can mean PMI on a conventional loan or the mortgage insurance premium on an FHA loan, and both protect your lender, not you, if you stop paying. Mortgage protection insurance is something else: it’s life insurance that pays the person you name as your beneficiary if you die during the policy term, and that money can go toward the mortgage.

What is mortgage insurance?

The Consumer Financial Protection Bureau (CFPB) says mortgage insurance lowers the lender’s risk “so you can qualify for a loan that you might not otherwise be able to get,” and that “it increases the cost of your loan.”

According to the CFPB, mortgage insurance “protects the lender – not you – in the event that you fall behind on your payments.” The CFPB adds that it’s typically required for borrowers “making a down payment of less than 20 percent of the purchase price.”

The type of mortgage insurance you pay depends on your loan:

• Conventional loans: private mortgage insurance, or PMI.
• FHA loans: a mortgage insurance premium paid to the Federal Housing Administration.
• VA-backed loans: the CFPB says “the VA guarantee replaces mortgage insurance, and functions similarly,” and there’s no monthly mortgage insurance premium. Instead, you pay an upfront “funding fee.”

What is private mortgage insurance (PMI)?

The CFPB says PMI is a type of mortgage insurance you might be required to pay with “a conventional loan with a down payment of less than 20 percent of the purchase price.” The CFPB says the requirement “usually also applies to refinancing a conventional loan, when your equity is less than 20 percent of the value of your home.”

The CFPB is direct about what PMI does and doesn’t do: “PMI protects the lender—not you—if you stop making payments on your loan.” It also says, “PMI does not protect you and you can still lose your home through foreclosure.”

Who sells private mortgage insurance?

Your lender arranges it. The CFPB says “PMI is arranged by the lender and provided by private insurance companies.”

How much does mortgage insurance cost?

There’s no single price. In its explainer on how mortgage insurance works, the CFPB says, “Private mortgage insurance (PMI) rates vary by down payment amount and credit score.” Your loan paperwork shows the charge:

1. Monthly PMI: “The most common way to pay for PMI is a monthly premium.” The CFPB says it’s shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
2. Upfront PMI: “Sometimes you pay for PMI with a one-time up-front premium paid at closing.” The CFPB says that shows up on page 2, in section B.

The CFPB also notes, “When you pay 20 percent down, PMI is not required with a conventional loan.”

What is the FHA mortgage insurance premium?

FHA loans have their own mortgage insurance. The CFPB says “FHA mortgage insurance is required for all FHA loans” and that “your mortgage insurance premiums are paid to the FHA.”

The CFPB says the FHA premium “includes both an upfront cost, paid as part of your closing costs, and a monthly cost.” If you don’t have the cash for the upfront part, “you are allowed to roll the fee into your mortgage instead of paying it out of pocket,” which the CFPB says increases your loan amount and overall cost.

When can you cancel PMI?

For mortgages on single-family primary homes “that closed on or after July 29, 1999,” the CFPB lays out these rules:

1. You can ask when your balance is scheduled to hit 80 percent of the home’s original value. “You have the right to ask your servicer to cancel PMI on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.” The CFPB says you’ll need to ask in writing, have a good payment history and be current on payments, certify there are no junior liens (such as a second mortgage), and be able to show (for example, with an appraisal) that your home’s value hasn’t fallen below its original value.
2. It generally ends automatically at 78 percent. “Even if you don’t ask your servicer to cancel PMI, in general, your servicer must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home,” as long as you’re current on payments.
3. It ends at the loan’s midpoint. “Your lender or servicer must end the PMI the month after you reach the midpoint of your loan’s amortization schedule,” if you’re current. On a 30-year loan, the CFPB says that’s after 15 years.

These rules don’t cover every loan. The CFPB says, “Mortgages through the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) have different requirements.” If you have an FHA loan, ask your servicer how and when your mortgage insurance premium ends.

What is mortgage protection insurance?

Mortgage protection insurance isn’t a loan fee. It’s a life insurance policy. The New York State Department of Financial Services (NY DFS) says that with decreasing term life insurance, “the face amount reduces over the period,” and “often such policies are sold as mortgage protection,” with the coverage shrinking as the loan balance goes down.

Who gets the money is the big difference from PMI. NY DFS says that with term insurance, “If you die during the term period, the company will pay the face amount of the policy to your beneficiary.” The Texas Department of Insurance (TDI) explains that your beneficiary is “the person you name in your policy,” and “you can name more than one beneficiary.”

If you outlive the term, NY DFS says no benefit is paid. For more on how this coverage works, see our guide to what mortgage protection insurance is.

How is that different from credit life insurance?

Credit life insurance, which the NAIC says is “sold in conjunction with a credit obligation or loan,” is a third product. The NAIC says that with credit life, “life insurance proceeds are paid directly to the creditor.” TDI says, “If you already have life insurance, you might not need credit life,” and that you can assign some of the death benefit to the lender to pay the loan balance.

The NAIC also says that, “with the exception of private mortgage insurance (PMI), lenders cannot deny you credit if you do not buy optional credit insurance,” and suggests checking what a traditional term life or disability insurance policy would cost. Ask your lender which insurance, if any, is a condition of your loan.

How do PMI, FHA mortgage insurance and mortgage protection compare?

If you’re weighing a decreasing policy against a level one, our comparison of mortgage protection vs. term life insurance goes through the trade-offs.

Questions to ask before you decide

1. Is the “mortgage insurance” on my Loan Estimate PMI, an FHA premium, or something else?
2. When is my balance scheduled to reach 80 percent and 78 percent of my home’s original value?
3. If I have an FHA loan, how and when does my mortgage insurance premium end?
4. Does my lender require any life or credit insurance, or is it optional?

The bottom line

PMI and FHA mortgage insurance are part of your loan, and the CFPB is clear that they protect your lender, not you or your family. Mortgage protection insurance is life insurance you buy that pays your beneficiary if you die during the term. A licensed agent can go over your mortgage protection options. Here’s how calling RestAssured works.

RestAssured is not an insurance company or an insurance agency; we connect callers with independently licensed insurance agents. RestAssured is not a lender and isn’t affiliated with any mortgage lender or servicer.

Frequently asked questions

What is mortgage insurance?

Mortgage insurance lowers the lender’s risk so you can qualify for a loan you might not otherwise get, and it increases the cost of your loan. The CFPB says it protects the lender, not you, if you fall behind on your payments.

Is PMI the same as mortgage protection insurance?

No. PMI protects your lender if you stop paying your conventional loan. Mortgage protection insurance is life insurance, often sold as decreasing term, that pays the face amount to your beneficiary if you die during the term, according to NY DFS.

When does PMI go away?

For mortgages on single-family primary homes that closed on or after July 29, 1999, the CFPB says you can ask your servicer to cancel PMI when your balance is scheduled to fall to 80 percent of your home’s original value. In general, the servicer must end it automatically at 78 percent if you’re current on your payments.

Who sells private mortgage insurance?

The CFPB says PMI is arranged by the lender and provided by private insurance companies. FHA loans are different: their mortgage insurance premiums are paid to the FHA.

Does FHA mortgage insurance cancel like PMI?

Not under the same rules. The CFPB says FHA and VA mortgages have different requirements than the PMI cancellation rules, so ask your servicer how your FHA mortgage insurance ends.

Sources

• What is private mortgage insurance? (Consumer Financial Protection Bureau)
• What is mortgage insurance and how does it work? (Consumer Financial Protection Bureau)
• When can I remove private mortgage insurance (PMI) from my loan? (Consumer Financial Protection Bureau)
• Types of Policies (New York State Department of Financial Services)
• Life insurance guide (Texas Department of Insurance)
• Credit Insurance (NAIC)

This article is for general education. Policy features, prices and eligibility vary by insurance company and state; your agent will explain the specific terms of any policy before you apply.