Mortgage insurance was created to allow consumers to purchase a home without a large down payment. Many home buyers do not have savings or reserves that are equal to 20% of the value of the home the wish to purchase.

Lenders do not like to lend money at low interest rates for more than 80% of the home value. This is because lenders need to be protected in the event of default or foreclosure. They are most wanting protection against decreases in the housing values and to assure that they could sell the property quickly, still recouping their loan amount. In addition, borrowers who have at least 20% equity in their homes default less often than borrowers with less equity.

Mortgage insurance assumes the lenders risk on the loan amount above 80% of the home value. This insurance has a cost associated with it, which is your monthly PMI or MI payment that is included in your mortgage payment if your loan requires PMI or MI. Mortgage insurance has served its purpose by providing more people the ability to purchase homes at low interest rates by decreasing the risk to lenders.