Why Do You Need Mortgage Insurance?

Mortgage insurance protects the lender.

Massive numbers of defaults on home mortgages stemming from the 2008 recession have forced mortgage insurance issues into the mainstream. There are two forms of mortgage insurance: private mortgage insurance (PMI), which protects the lender in case of default, and mortgage protection insurance (MPI), which acts as a life insurance policy in case the borrower dies or becomes incapacitated. The latter is far less important than the former when applying for a loan. In both cases, it is really the lender who is being protected.

Features

When a buyer cannot come up with a large down payment (normally defined as 20 percent or more), PMI is almost universally required. Of course, it protects the lender, not the borrower, but it serves to make getting mortgages much easier. If you are willing to pay the extra money (the policy is usually about .5 percent of the loan amount, spread out over the life of the loan), then getting the loan is much easier with PMI. The main reason why you need PMI is to make getting a loan easy, especially if you have little ready cash at hand.

Function

PMI protects the lender. In an age of mass default, this kind of insurance is necessary for banks and other lenders to get back into the debt market with any level of peace. PMI is needed not only for the ease of getting a loan, but it is necessary at the "macro" level as well. Without such insurance, many firms would be very wary about getting back into the mortgage game after the recession of 2008-2010.

Benefits

Another important reason why you need mortgage insurance is that you can, as of 2007, write off the monthly premium on income tax forms. This makes taking out a policy much easier and less painful. Both PMI and MPI premiums can be written off.

MPI

While rarely required by lenders, MPI might be a worthwhile policy for many. Peace of mind is the main reason why MPI make senses. If the breadwinner of the house dies or becomes ill, the MPI policy pays off the mortgage, or at least a substantial part of it. It costs about the same as PMI insurance, and this also can be written off. It is not nearly as common as PMI, but may help a home buyer get a loan if he makes it plain to the lender that he will be investing in a MPI policy.

Effects

All told, the increasing significance of both MPI and PMI might make it easier for a first-time home buyer (or a home buyer with a bad credit history) to get a loan. It can cushion the cost of default and protect the market from bad loans. Over the long term, PMI especially might make the mortgage debt market much easier to navigate, especially for home buyers with little money to put down.

References

• The Money Alert: Private Mortgage Insurance Basics
• USWA: What Is Mortgage Insurance?