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Mortgage insurance vs home insurance

Fact-checked with HomeInsurance.com

If you’ve purchased a home and have a mortgage you’re paying off, you’re probably aware of the fact that your lender requires you to have at least one kind of insurance for your home, if not two. Financed homes typically require homeowners insurance, and depending on the size of your down payment, you may also have to pay for mortgage insurance. 

Between homeowners insurance, private mortgage insurance and mortgage protection insurance, it can be confusing to understand what each covers and what you need. In this article, we’ll explore what the difference is between each of these, which may help you save money in the long run.

What is mortgage insurance?

Mortgage insurance, also known as mortgage protection insurance (MPI) is an optional type of insurance that steps in to make your monthly mortgage payments if you’re disabled, unemployed or pass away. If you’re worried about losing your home after a bad stroke of luck, MPI can give you the assurance of knowing your mortgage payments are covered.

What is PMI insurance?

Private mortgage insurance (PMI), on the other hand, is a type of insurance your lender will require you to pay if you can’t (or don’t) put down a large enough down payment when you purchase a home. Essentially, you’re paying for coverage that protects the lender if you don’t make your payments and default on your home loan. If your mortgage does not require a 20% down payment, you likely won’t be required to pay PMI.

PMI and MPI sound similar, but they protect two different parties. PMI protects the lender if you can’t make your loan payments, whereas MPI protects your best interests by paying your mortgage if you can’t make payments yourself.

What does PMI cover?

Private Mortgage Insurance (PMI) covers your lender against any losses they may suffer if you stop making your mortgage payments. You’ll need to pay for the insurance — typically as part of your monthly mortgage — to make sure your lender is protected if you default.

How much does PMI cost?

The cost of Private Mortgage Insurance can vary. It’s based on factors such as the amount of your mortgage, the size of your down payment and your credit score. Expect to pay as little as 0.3% to 1.5% per year of the original home loan amount, broken down into monthly payments.

How can I avoid paying PMI

PMI doesn’t really provide you with any benefit for the money you pay every month. To avoid this expense, you can save until you are able to pay a down payment of at least 20% when you buy a home. You could also drop the PMI later, when you have at least 20% in equity in your home, but you’d need to get an appraisal and send a written request to have PMI removed. 

Here’s an example scenario to illustrate:

  • Your mortgage is $110,000
  • Your home is worth $120,000
  • You’ve paid down $10,000 of the principal balance of your home 

That means you owe $100,000 on a home with a value of $120,000. This means your equity is 20%. In this situation, you could get an appraisal confirming your home is worth at least $120,000 and ask your lender to remove the PMI requirement.

Who needs PMI?

Lenders will usually require all borrowers who haven’t paid a down payment of at least 20% to buy PMI. It’s in your best interest to save enough money for a larger down payment, or you’re essentially wasting money to protect the lender. Think about it — if your home loan is $300,000, you’ll need to pay $3,000 per year ($250 per month) in PMI. 

If you need to purchase a new home right away and don’t have the flexibility or time to save for the full down payment amount, PMI could help enable you to buy the home. Ultimately however, you’re still paying that cost over time. 

What is homeowners insurance?

Homeowners insurance is the third type of insurance related to your mortgage. A home insurance policy protects your home and the contents inside against losses and damages such as fire, storms, vandalism, burglaries and more. While MPI protects your payments and PMI protects the lender, homeowners insurance protects your most important investment — your home and belongings.

Mortgage insurance vs. home insurance

Is mortgage insurance the same as homeowners insurance? They’re related, but entirely different products, serving different functions and may or may not be required based on your circumstances. 

You may not get much of a choice on whether you have to pay private mortgage insurance, depending on whether or not you can provide the qualifying down payment amount. The protected party with PMI is the lender, so if you can avoid this expense, it’s in your best interest to do so.

Mortgage protection insurance (MPI) protects you if you’re unable to make payments on your home, but there are limitations; MPI only steps in for covered instances, such as unemployment, disability or death. This coverage type is optional in most cases.

In contrast to MPI and PMI, Homeowners insurance is more like a traditional policy. It protects your home and property against natural (and man-made) disasters. Homeowners insurance will pay for the cost of rebuilding or replacing your home if it’s destroyed in a fire, broken into or severely damaged by hail. Required by lenders if you have a mortgage, home insurance is still a smart protection to invest in even if you own the home out-right. 

To help compare the differences between homeowners insurance vs mortgage insurance, check out the chart below:

Private mortgage insurance (PMI)Mortgage Insurance (MPI)Home insurance
Who it benefits The lenderThe homeownerThe homeowner
Who requires itThe lenderThe homeownerLender/homeowner
Cost.03 to 1.5% of home value.Depends on many factorsVaries by state; $1,211 on average
MandatoryYes, if you can’t pay a required 20% down, or until you have 20% in home equity.OptionalYes, as long as you’re paying your mortgage. 
Premium frequencyMonthly or annualFlexibleMonthly, every six months or annual.
Cancellation optionYes, once you have 20% equity.YesYes, once you pay off your mortgage loan.

The takeaway

  • Private mortgage insurance (PMI) is a type of insurance you may be required to pay to protect the lender if you default on your mortgage.
  • PMI is typically required if you don’t put at least 20% down when you buy a home.
  • Homeowners insurance covers your home’s structure and its contents.
  • Mortgage protection insurance can be purchased to protect you by making your mortgage payments if you’re unable to do so.

Conclusion

Buying a home may be one of the most important events in your life. Insuring your home protects your investments. Homeowners insurance protects your home and its contents. Mortgage protection insurance steps in to make your monthly mortgage payments if you’re unable to. Private mortgage insurance may be required by your lender if you didn’t pay at least 20% as a downpayment when you purchased your home. Depending on your circumstances, one or more of these protections may be required.

Cynthia Paez Bowman

Writer

Cynthia splits her time between Los Angeles, CA and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development.

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