What is mortgage insurance?

Mortgage Insurance is a financial guaranty that insures lenders against loss in the event of default on a mortgage. If you default and the lender takes title to the property, the mortgage insurer reduces or eliminates the loss to the lender. Consequently, the mortgage insurer shares the risk of lending the money to the borrower.

(Mortgage insurance should not be confused with mortgage life insurance, which provides coverage in the event of a borrower’s death, or homeowner’s insurance, which protects the homeowner from loss due to damage from fire, flood or other disaster.) 

What does mortgage insurance do for you?

Without the guaranty of mortgage insurance, lenders normally require you to make a down payment of at least 20% of a home’s purchase price, which can mean years of saving for some borrowers. This large down payment assures the lender that you are committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment.

With the guaranty of mortgage insurance, lenders are willing to accept as little as 5% or 10% down. Mortgage insurance fills the gap between the standard requirement of 20%. A low down payment also allows you to purchase more home than you might otherwise be able to afford.

Generally, the initial premium for mortgage insurance is collected at closing, and depending on the premium plan chosen, a monthly amount may be included in the house payment made to the lender, who, in turn, remits payment to the mortgage insurer.