The difference between private mortgage insurance (PMI) and mortgage protection insurance (MPI) is significant, but homeowners are often confused about the distinction. While the acronyms are similar, "PMI" and "MPI" have very different meanings and purposes.
Homeowners sometimes mistakenly think that if they have PMI, the insurance will cover their mortgage payments if they lose their job, become disabled, or die. But that’s not what PMI does. PMI actually protects the lender if the borrower doesn't pay the loan.
On the other hand, depending on the terms of the insurance policy, MPI will make your mortgage payments for a while if you lose your job or become disabled, or it might pay off the mortgage when you die.
What Is PMI? Protection for the Lender
PMI protects the lender against the risk that the borrower might default on the mortgage payments. If you fail to make the mortgage payments and go through a foreclosure, this kind of insurance pays the lender if your house isn't worth enough to pay back the loan fully.
PMI has nothing to do with you losing your job, becoming disabled, or dying, and it won’t make your mortgage payments if any of these events happen.
Will My Lender Require PMI?
When a borrower takes out a mortgage loan and puts less than 20% down, the lender typically requires PMI. The borrower then has to pay an extra amount each month to cover the PMI premium, along with amounts for principal and interest, and taxes and insurance if the loan is escrowed.
How Can I Get Rid of PMI?
Once you’ve made enough payments and your loan-to-value ratio is 80%, you may ask your mortgage servicer to cancel PMI.
For example, suppose you own a home worth $100,000 and, over time, you pay off $20,000 in principal. At that time, you may ask the servicer to cancel your PMI. Under federal law, the lender has to let you know at closing how long it will take for you to get to the 80% level.
When the Lender Must Cancel PMI
Even if you don’t ask the servicer to cancel your PMI, the lender has to automatically cancel it when the loan-to-value ratio is 78%.
However, sometimes mistakes happen. If your PMI isn't canceled at this point, contact your loan servicer.
Mortgage Protection Insurance (MPI): For Borrowers' Protection
Depending on the insurance policy's terms, MPI (unlike PMI) will make your mortgage payments for a specific amount of time if you become unemployed or become disabled, or pay off the mortgage when you die.
Do I Have to Get MPI?
While many lenders require PMI when a borrower's down payment is less than 20%, MPI is voluntary.
Should I Buy MPI?
If you’re healthy, relatively secure in your career, and don’t have a risky lifestyle (and you have other insurance, like life insurance and disability insurance), you probably don’t need to buy MPI. But if you think that your particular circumstances or risk factors might warrant getting this type of insurance, consider purchasing it.
Read More Articles
Learn how the foreclosure process works if you can't make your mortgage payments.
Find out how soon a foreclosure can start if you fall behind in mortgage payments.
Get information about ways to avoid foreclosure in What Is Loss Mitigation?
Talk to a Lawyer
If you can't make your mortgage payments and don't have MPI in place that will protect you, consider talking to a lawyer to learn about how to avoid a foreclosure.