If I pay mortgage insurance and default on my loan, why wouldn't that cover the deficiency amount?

The mortgage insurance is not there for your protection, just the lender's. If you are paying PMI (private mortgage insurance) it is there to protect the lender in case you default on your loan. You can usually get the PMI removed after you have enough equity in the home. The lenders will not remove this for you. It is your responsibility to get this removed. Afterall, why do you want to be paying PMI if you don't have to. It doesn't protect you, it protects the lender.

For more information on PMI, contact me. If you are a first time buyer, please contact me and we'll set up a buyers consultation to discuss buying a home.