PMI vs. mortgage protection insurance: the difference that protects your family

What PMI is and who it protects

PMI is insurance a lender may require on a conventional loan when your down payment is less than 20% of the purchase price. The lender arranges it with a private company and you pay for it: according to the CFPB, it can be a monthly premium added to your mortgage payment, a one-time upfront premium at closing, or a combination of both.

Example: on a conventional loan, if you put 5% down, the lender will generally require PMI; if you put 20% or more down, it generally will not. FHA loans are different: according to the CFPB, mortgage insurance is required on all FHA loans, even with 20% or more down.

The CFPB is clear: PMI protects the lender, not you. If you fall behind on payments, PMI does not protect you and you can lose your home to foreclosure. It also pays nothing to your family if you die.

• FHA loans: according to the CFPB, all of them carry mortgage insurance, with an upfront payment and a monthly one.
• USDA loans: according to the CFPB, the insurance is paid at closing and as part of the monthly payment.
• VA loans: the VA guarantee replaces mortgage insurance; there is no monthly mortgage insurance premium, but you pay an upfront funding fee.

All mortgage insurance, whether PMI, FHA or USDA, protects the lender. None of them is life insurance for your family.

When PMI can be removed

According to the CFPB, for single-family primary-home loans closed on or after July 29, 1999:

• At 80%: you can ask in writing to cancel it on the date your balance is scheduled to reach 80% of the home’s original value, or sooner if extra payments bring your balance to that level. You must be current, have a good payment history, certify that there are no other liens on the home and show, for example with an appraisal, that the value has not fallen below the original value.
• At 78%: the loan servicer generally must remove it automatically on the date your balance is scheduled to reach 78% of the original value, if you are current.
• At the midpoint: it must also end the month after the midpoint of the payment schedule (on a 30-year loan, after 15 years), if you are current.

FHA and VA loans, and loans where the lender pays the mortgage insurance, have different rules. Ask your loan servicer when your mortgage insurance ends.

What mortgage protection insurance is

In this guide, “mortgage protection” means a life insurance policy in your name designed around your mortgage. If you die during the term, the insurer pays the benefit to the person you named, not to the bank. Your family decides whether to use it to pay off the mortgage, keep making the monthly payments or cover other expenses.

It is often built with term insurance for a period similar to what is left on the mortgage. The Florida life insurance guide, for example, describes 30-year term coverage to cover you until the mortgage is paid off. Some term policies include a return of premium: if you are still living when the term ends (for example, 10, 20 or 30 years) and you paid all the premiums, the insurer pays back what you paid, under the terms of the contract. This and other riders depend on the insurer, the product and the state.

Some products with similar names, such as credit life insurance, pay the lender. Before you sign, check who receives the money.

Be careful with the bank’s credit life insurance

Some banks offer credit life insurance. According to the NAIC, it pays off all or part of the loan if you die, but the money goes directly to the creditor, not to your family. It is optional: except for PMI, a lender cannot deny you credit for not buying it.

The NAIC recommends comparing its cost with a traditional term life policy before deciding.

PMI vs. mortgage protection: side by side

The differences that matter most:

• Who it protects: PMI, the lender; mortgage protection, your family.
• Who requires it: the lender may require PMI on certain loans; mortgage protection is optional and your choice.
• What it pays: PMI covers the lender’s loss if you don’t pay; mortgage protection pays a benefit to your beneficiaries if you die.
• Who gets the money: with PMI, the lender; with mortgage protection, the person you named.
• How long it lasts: on conventional loans, PMI can generally be removed at 80% or ends at 78%; mortgage protection lasts for the policy term you choose.

Frequently asked questions