What is mortgage insurance?

Mortgage insurance is specifically designed to protect lenders against the risk of borrower default. When a borrower takes out a mortgage, particularly one with a low down payment, the lender faces the heightened risk that the borrower may not be able to make their loan payments. This is where mortgage insurance comes into play. By requiring mortgage insurance, lenders can mitigate their financial exposure, as the insurance will cover the losses in the event that the borrower defaults on the loan.

This type of insurance is usually included in conventional loans where the down payment is less than 20% of the property's value, and it can either be paid upfront or rolled into the monthly mortgage payments. The primary purpose is not to protect the homeowner or the property, but rather to safeguard the lender’s investment, ensuring that they recover some or all of the loan amount in case the borrower fails to fulfill their payment obligations.