Top 6 Reasons Why Mortgage Insurance Is Important in the USA

PMI is specifically for conventional home loans, and most lenders provide some form of mortgage insurance in addition to traditional mortgages. Most conventional lenders will require you to buy mortgage insurance if your down payment is less than 20% to partially or fully reimburse them if you can’t make loan payments. 

Lenders further divide PMI into four types:

Borrower Paid Monthly

Borrower paid monthly is the simplest type. The borrower includes the insurance premiums in their monthly payment. 

Borrower Paid Single Premium

With a borrower-paid single premium, the borrower makes a single insurance payment upfront or rolls the payment into their monthly mortgage.

Split Premium

With a split premium plan, the borrower splits premiums between an upfront payment and monthly mortgage payments. 

Lender Paid

With a lender-paid mortgage, the borrower pays their monthly premium in the form of a higher mortgage origination fee or interest rate. 

Mortgage insurance premiums are a scheme associated with FHA loans. However, unlike private lenders, FHA requires all borrowers to buy MIP, regardless of the size of their down payment. 

As of 2024, the annual MIP cost was 0.55% of the total mortgage amount. 

VA home loans are unique in that borrowers do not have to pay mortgage insurance premiums (the government guarantees full loan coverage already). 

However, VA loan borrowers do have to pay a “funding fee,” the cost of which varies based on your down payment, military service record, and disability status. You can either pay the fee upfront or include payments in your monthly mortgage. 

Mortgage life insurance is specifically meant to pay off any outstanding mortgage debt in the event you pass away. Like most life insurance policies, the policyholder pays a monthly premium, and the beneficiary receives a death benefit if they die. 

The main difference is that with a mortgage life insurance policy, the main beneficiary is the mortgage provider, not surviving family and loved ones. Mortgage life insurance is different from typical mortgage protection insurance as the conditions for payout include the death of the borrower. 

The main reason to purchase mortgage insurance is to protect your mortgage. Mortgages are large expenses, and changes to your finances can make you unable to keep up with housing costs. If it gets too high and you default, the bank could take your home as collateral. 

Mortgage insurance protects the borrowers from a loss. That way, homeowners can potentially avoid foreclosure if they are unable to make monthly payments. 

In that sense, insurance protects your home when you:

• Temporarily lose your job
• Become disabled
• Lose your main source of income

The average loan-to-value ratio of conventional mortgages with mortgage insurance is 92.9%, according to data from the Urban Institute. That means the majority of people have loans covering the majority of their property purchase. So, defaults on mortgages can incur massive debt. 

Property loan insurance can at least partially relieve this burden, providing peace of mind and comfort. With a good PMI policy, your losses won’t be as high if you default during a home purchase. With a home loan, you’d be at risk of foreclosure. 

So, mortgage insurance provides an important financial safety net to deal with unexpected life events. You never know if your finances are about to take a hit from an emergency, so having a backup plan to provide mortgage assurance is a good idea. 

Every loan carries risks for the lender. Mortgage insurance provides risk mitigation for borrowers so that these companies or banks can continue to offer mortgages to the homeowners depending on them. 

Lenders assess risk by loan-to-value ratios—i.e., the ratio of a loan to the total value of the property. The higher the LTV ratio, the more risk the loan carries. That would mean the lender has to cover a greater portion of the home’s total cost. 

Mortgage insurance hedges this risk by ensuring that the lender can still recoup part of their investment if the borrower defaults on payments. This allows your creditors to offer laxer lending criteria, which is good news for those who might be new to the housing market. 

Mortgage insurance also has benefits beyond just the individual; a healthy mortgage insurance industry is necessary for robust housing activity. Think of it this way: most people need to take out loans to buy a house. However, lenders end up taking a big risk when they issue a mortgage. 

Mortgage insurance protects lenders from risk, so they are more able to issue home loans. The result is that the housing market is more stable. In fact, some studies have found that mortgage insurance stabilizes the housing market and increases homeownership rates because it provides a pathway for first-time and low-income buyers to buy homes. 

Without mortgage insurance, home buying would slow down and first-time buyers may get priced out of the market without sufficient down payments. Mortgage insurance plays a necessary stabilizing role by balancing overall market risk, allowing the housing market to flourish. 

Traditional wisdom says that you should put down at least a fifth of the house’s value as a down payment. However, that percentage is out of many homeowners’ budgets. If you cannot make a 20% down payment, you can make a lower one with mortgage insurance.

Depending on your credit score and the type of mortgage insurance you get, your down payment could be as low as 3%. That means mortgage insurance might be a good idea if you have the funds to make loan payments but cannot currently make a larger down payment. 

Mortgage insurance gives you more flexibility, so you can stick to a more realistic housing budget. It lets pursue home ownership on your own terms. 

Perhaps most importantly, mortgage insurance is beneficial as you probably won’t be able to get a loan without it. Most conventional lenders will require you to purchase mortgage insurance if your down payment is less than 20%. Fortunately, most mortgage lenders also provide mortgage insurance options, so you don’t have to hop around providers to find a plan that meets your needs. 

Lenders also make it easy to make mortgage payments by including them in your monthly payment. That way, you won’t have to worry about keeping a separate account for mortgage expenses—it's all rolled into a single, comprehensive payment.