Mortgage insurance is an insurance policy that protects a mortgage lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.

Mortgage insurance can refer to private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance, or mortgage title insurance. What these have in common is an obligation to make the lender or property holder whole in the event of specific cases of loss.

Mortgage life insurance, on the other hand, which sounds similar, is designed to protect heirs if the borrower dies while owing mortgage payments. It may pay off either the lender or the heirs, depending on the terms of the policy.

How Mortgage Insurance Works

Mortgage insurance may come with a typical pay-as-you-go premium payment, or it may be capitalized into a lump-sum payment at the time of mortgage origination. For homeowners who are required to have PMI because of the 80% loan-to-value ratio rule, they can request that the insurance policy be canceled once 20% of the principal balance has been paid off.

Here are three types of mortgage insurance:

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a type of mortgage insurance a borrower might be required to buy as a condition of a conventional mortgage loan. Like other kinds of mortgage insurance, PMI protects the lender, not the borrower. The lender arranges PMI and it’s provided by private insurance companies.

PMI is usually required if a borrower gets a conventional loan with a down payment of less than 20%. A lender might also require PMI if a borrower is refinancing with a conventional loan, and equity is less than 20% of home value.

Qualified Mortgage Insurance Premium (MIP)

When you get a U.S. Federal Housing Administration (FHA)-backed mortgage, you will be required to pay a qualified mortgage insurance premium, which provides a similar type of insurance. MIPs have different rules, including that everyone who has an FHA mortgage must buy this type of insurance, regardless of the size of their down payment.