When buying a home, it's tempting to shave costs wherever you can. With closing fees piling up and a monthly mortgage looming, many borrowers start scanning their loan estimate for expenses they can avoid – and mortgage insurance often lands in the crosshairs.
But before you write it off as just another unnecessary charge, it's worth asking: what happens if you don't have mortgage insurance?
At first glance, it might seem like an optional add-on that only benefits lenders. But in reality, overlooking mortgage insurance – especially when it could be structured creatively or strategically – is a decision that can come with serious and often hidden long-term costs.
In this post, we'll unpack the financial risks, market vulnerabilities, and missed opportunities that come with skipping mortgage insurance.
Let's start with the basics. Mortgage insurance comes in two common forms: Private Mortgage Insurance (PMI) and Mortgage Insurance Premiums (MIP). PMI typically applies to conventional loans when you put down less than 20%. MIP is required for most FHA loans, regardless of your down payment.
While mortgage insurance technically protects the lender in case you default on your loan, its presence can benefit the borrower too. It allows you to get into a home sooner, sometimes with a lower down payment and more favorable loan terms. It can even open up loan options that would otherwise be unavailable.
In short, it's not just a fee, it's a financial tool.
There's a common perception that mortgage insurance is a "wasted" cost. After all, you're paying for a policy that protects the bank – not you – if things go south. Some homebuyers work hard to avoid it altogether by scraping together a full 20% down payment or seeking out special loan programs.
But skipping mortgage insurance isn't always the money-saver it appears to be. In many cases, lenders compensate for the added risk of an uninsured loan by increasing your interest rate or adding other fees.
So, while you might be avoiding a monthly insurance premium, you could be signing up for higher costs over the life of the loan – costs that could easily outpace what the insurance would have been.
Choosing to forgo mortgage insurance can expose you to several hidden risks, especially during times of economic uncertainty or personal hardship.
1. Market Downturns
If housing values drop – and history shows they sometimes do – owners without much equity can find themselves upside down on their mortgage. Mortgage insurance offers a buffer, especially early in the life of the loan, when your stake in the home is smallest.
2. Job Loss or Financial Setbacks
Life happens. If your income suddenly changes and you can't make your mortgage payment, being in a high-risk loan without insurance support can leave you with few options. In some cases, mortgage insurance can actually make it easier to qualify for forbearance or loan modifications.
3. Limited Flexibility Later
Let's say you want to refinance in a few years. Lenders often look at your loan history, and not having mortgage insurance could impact your eligibility or terms, especially if you didn't build equity quickly.
Most buyers focus on immediate, visible costs – monthly payments, closing costs, and down payments. But it's the long-term, invisible costs of skipping mortgage insurance that can quietly pile up:
Higher Down Payment Requirement
Avoiding mortgage insurance typically means putting down at least 20%. That's money tied up in your house – money you could've used to invest, build an emergency fund, or pay off debt with higher interest rates.
Lost Liquidity
A large down payment may reduce your financial flexibility. If you hit a rough patch, you can't exactly pull money out of your walls. Mortgage insurance lets you keep more cash on hand in exchange for a relatively small monthly premium.
Slower Wealth Building
Ironically, mortgage insurance can speed up your path to homeownership. Instead of waiting years to save a big down payment, you can buy a home now, start building equity, and possibly refinance or remove PMI down the road.
If your main concern is cost, it's worth knowing that not all mortgage insurance is structured the same. In fact, there are a few alternatives that might work better for your situation:
Lender-Paid Mortgage Insurance
Some lenders offer to cover the insurance themselves, in exchange for a slightly higher interest rate. It's worth running the numbers to see what works best for your long-term goals.
Piggyback Loans
A second mortgage or home equity line of credit (HELOC) can sometimes help you avoid mortgage insurance by covering part of your down payment. But beware, these come with their own risks and costs.
Wait & Save
In some cases, it may make sense to delay buying until you can put 20% down comfortably. Just make sure you're factoring in rising home prices during the wait.
The decision to skip mortgage insurance shouldn't be made lightly. It's not just about saving a few hundred dollars a year; it's about understanding your risk profile, your financial goals, and the reality of today's housing market. In some cases, mortgage insurance may be unnecessary. But in many others, it's a small price to pay for peace of mind and future flexibility.
Working with an insurance expert, like those at SimplyIOA, can help you explore these options in a way that fits your unique financial picture. They can also help you compare mortgage insurance options and show you how to minimize risk while maximizing opportunity.
If you need help finding the best homeowners insurance coverage for the best price, start by speaking to a SimplyIOA agent at 833.872.4467 or getting a homeowners insurance quote online now.