Private Mortgage Insurance vs. Homeowner's Insurance: What's the Difference?

Mortgage and Lending

Private mortgage insurance (PMI) protects the mortgage lender if a homeowner defaults. 

PMI allows the lender recover some of its costs and losses after foreclosing and selling a repossessed home.

PMI rates vary by loan type, loan size, and loan characteristics.  The higher the risk to the bank, the higher the cost of PMI.

Following are two types of PMI:

  1. Borrower-paid mortgage insurance
  2. Lender-paid mortgage insurance

Borrower-paid mortgage insurance is the more common version of PMI.  It may be payable up front, payable monthly, or both.  However, once the mortgage balance is reduced to 80% of the home's value, PMI may no longer be required by a lender.

This reduction can occur by principal being paid down, home appreciation, or a combination of the two.

With lender-paid mortgage insurance, there is no monthly payment because the mortgage note's interest rate is increased and is, therefore, "self-insuring".  That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.

Another type of insurance is called homeowners insurance, or hazard insurance. 

Homeowner's insurance is property insurance that protects against losses in the event of a catastrophe. 

Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed.  However, it's a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.

For example, if a home is destroyed in a fire:

  • The homeowners insurance will repay the lender for the amount due on the mortgage
  • The personal property insurance will repay the homeowner for personal possessions destroyed
  • The liability insurance will protect the homeowner from third-party claims related to the fire

Homeowner's insurance is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.

Wikipedia--Private Mortgage Insurance

Wikipedia--Home Insurance


Comments (5)

Randall Schrader
Competitive Insurance of Dundee - Dundee, FL

PMI is great, the borrower is betting AGAINST himself.  He uses his money to contribute to a fund that pays for his own default.  Why not put it in savings and give it back if it is not needed?  If it is, several payments would be saved in a couple of years. 

With 80 20 loans, who would pay PMI anyway?

Oct 11, 2008 10:15 AM
Donald Stevens

Thank you for spending the time to clarify the difference between Private Mortgage Insurance and HO policies.  As an insurance agent there is a lot of confusion over the differences between PMI, Homeowners insurance, and forced placed insurance. Basically Homeowners insurance protects the home owner and the bank while PMI and Forced Place Insurance is designed to protect the mortgage company exclusively.

I am constantly educating my auto insurance customers about keeping and paying for forced place insurance.  The think the rate is OK or a little high, but for the coverage, the rate is very high.  The forced place isurance only protects the banks interest in the property.  There is usually no liability coverage, contents coverage, or even enough money to rebuild the home.  I wish the banks were required to get either a verbal or written confirmation from the home owner clarifying the coverage.

Too many people are not aware of how much risk they have taken on by allowing the bank to place insurance on the home until it is too late.


The Home Insurance Specialist

Jun 07, 2009 08:10 AM

The first line in this article says "Private mortgage insurance (PMI) protects the mortgage lender if a homeowner defaults". My question is what if the homeowner doesn't default will the PMI that was paid already, account for the principal amount of the home loan or will it be refunded?

Mar 09, 2012 04:08 AM

Well of course your insurance premium does not get refunded.  That's their fee for the service.  You don't get your car insurance back at the end of the year if you don't crash your car, do you?

Mar 14, 2012 04:28 AM
Cambridge Credit Counseling

Perhaps the most difficult scenario to resolve occurs when the home’s value falls below the balance owed, a situation we call being underwater.   Home Affordable Refinance Program, or HARP, is an attempt to remedy this situation. Under the new program, homeowners who owe more on their homes than they are worth will be able to refinance no matter how much they are underwater.  For more information, contact one of our HUD Housing Counselors at Cambridge Credit or call 1-800-235-1407 to speak to a certified counselor now.




Mar 14, 2012 05:51 AM