Homeowners Insurance vs. Private Mortgage Insurance

October 14, 2021
Homeowners insurance protects your home, while private mortgage insurance (PMI) protects your mortgage lender from the effects of loan default.

Understanding homeowners insurance and private mortgage insurance is an important part of the homebuying process. While these terms may be new to you (especially if you’re a first-time homebuyer), we have all the info you need to know before making your home purchase: 

What’s the Big Difference? 

Homeowners insurance covers you and your property itself. Each insurance plan is different, but it typically protects damage to the structure of your home and your personal belongings, and liability in the case of a lawsuit.  

Private Mortgage Insurance (PMI) protects your lender if you stop making payments on your loan. It typically comes in the form of a monthly payment that is added to your existing mortgage payment, and is usually required for those who make a down payment of less than 20%. 

Do I Need Both Homeowners Insurance and PMI? 

It depends. Homeowners insurance is not required by law for owning a house. However, your lender will likely require it in order to take out a mortgage with them to protect their interest in the home. Not only does it benefit you by protecting your home, possessions, and legal well-being, it also benefits your lender – since you’re using their money to finance your home, it’s an investment for them, too. All in all, it’s wise to have. 

When it comes to PMI, your lender may require it if your down payment is  less than 20%. Because a smaller down payment indicates a higher risk, most lenders will require PMI as a security blanket so they don’t suffer loss if you default on your loan and your house isn’t worth enough to repay the debt in full.

PMI can be removed once you build enough equity in your home or if a new appraisal is ordered and the home’s loan-to-value ratio is 80% or less. If you are currently paying PMI and think you might be eligible to remove it, contact your loan originator.

You might be thinking, “Okay, so does paying PMI even benefit me?” Yes! Paying a little extra each month for PMI allows you to have a smaller down payment. Essentially, the money you’re saving up front will add up each month in your PMI. Like homeowner’s insurance, it can be mutually beneficial. 

Homeowners Insurance vs. PMI: Fast Facts 

Homeowner’s Insurance

Private Mortgage Insurance (PMI)

Is it required?

Homeowners insurance is not required by law, but is probably required by your lender.

Yes, PMI is required if you put less than 20% down.

What does it cover?

Homeowners insurance covers damage to your house, damage to your belongings, and liability.

PMI protects your lender from the effects of loan default.

 How do I get it? Homeowners insurance is purchased by the homeowner. You may be able to get it through an existing insurance provider – like auto insurance. Otherwise, your loan originator or Realtor may have recommendations. Your mortgage lender will obtain your Private Mortage Insurance. This will most likely be paid as a monthly premium, which is added to your monthly mortgage payment.

Does it benefit me?

Yes, homeowners insurance provides financial security for you, if your home and/or belongings are damaged.

PMI can be beneficial for homebuyers because it allows you to purchase a home with less than 20% down.



For more information, contact a home loan expert in your area.