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

Quick answer: 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. You pay for both, but only one of them is for you.

The short version

If you put less than 20% down on a conventional loan, your lender probably made you pay for PMI. It shows up in your monthly payment. A lot of people assume that means the house is "insured" if something happens to them.

It isn't. PMI never pays your family a dime.

What PMI actually does

PMI exists because a small down payment is a bigger risk for the bank. If you stop paying and the home goes to foreclosure, PMI helps cover the lender's loss.

• Who it protects: the lender
• Who pays: you, usually as part of your monthly payment
• When it ends: on most conventional loans you can ask to cancel it once you reach 20% equity, and it's typically dropped automatically at 22%. FHA loans work differently and have their own mortgage insurance rules.

PMI doesn't care whether you passed away, got hurt, or just fell behind. It's there for the bank either way.

What mortgage protection does

Mortgage protection is life insurance built around your mortgage. You pick a coverage amount close to your balance and a term that matches the years left on the loan.

• Who it protects: your family
• Who gets the money: the people you name, not the bank
• What they do with it: whatever they need. Pay off the house, cover a few years of payments, or keep it for bills while they figure things out.

Some policies also include living benefit riders that can pay part of the benefit early if you're diagnosed with a qualifying chronic, critical, or terminal illness. What's included depends on the carrier and the policy, so it's worth asking.

Side by side

• PMI: required by the lender, protects the lender, goes away as you build equity.
• Homeowners insurance: required by the lender, protects the house itself from fire, storms, and theft.
• Mortgage protection: not required by anyone, protects your family's ability to stay in the home if you die.

Here's the part that surprises people: your lender requires the two that protect them. The one that protects your family is optional, which is exactly why so many families don't have it.

Do you need mortgage protection if you already have life insurance?

Maybe not. If you already have enough life insurance to pay off the house and still take care of everything else, you're covered. The question is whether the amount you have is really enough for both.

Work coverage is where people get caught. It's often one or two times your salary, and it usually ends when you leave the job. Here's more on whether work coverage is enough. Our free mortgage protection calculator will show you what your family would still owe using your own numbers.

The bottom line

PMI is a cost of borrowing. Mortgage protection is a decision about your family. If you'd want them to keep the house, it's worth ten minutes to see what it would take. And if you don't need it, we'll tell you.

This article is general education, not advice for your specific situation. Coverage, pricing, and policy features vary by carrier, state, age, and health, and every policy is subject to underwriting approval.