What is Mortgage Insurance?

Brid Mortamais June 17, 2023

Mortgage insurance, also known as mortgage guarantee or mortgage protection insurance, is a type of insurance that protects the lender in case the borrower defaults on their mortgage loan. It is typically required by lenders when the borrower makes a down payment of less than 20% of the home's purchase price.

The purpose of mortgage insurance is to mitigate the risk for the lender by providing financial coverage if the borrower fails to make their mortgage payments and the property goes into foreclosure. The insurance pays the lender a certain percentage of the outstanding loan balance to help recover their losses.

There are two main types of mortgage insurance:

Private Mortgage Insurance (PMI): This type of insurance is provided by private companies and is typically required for conventional loans. The cost of PMI is usually added to the borrower's monthly mortgage payment until a certain threshold of equity is reached, often when the loan-to-value (LTV) ratio drops below 80%. At that point, the borrower may be able to request the cancellation of PMI.
Mortgage Insurance Premium (MIP): This type of insurance is required for certain government-backed loans, such as FHA (Federal Housing Administration) loans. The MIP is paid as an upfront premium at the time of closing and as an ongoing premium added to the monthly mortgage payment. Unlike PMI, MIP may be required for the entire duration of the loan, depending on the terms and down payment made.

Mortgage insurance helps make homeownership more accessible to borrowers with limited funds for a down payment. It provides a level of protection for lenders, allowing them to approve loans with higher loan-to-value ratios. However, it is important to note that mortgage insurance benefits the lender, not the borrower. It does not provide any coverage or protection for the homeowner in case of financial hardship or inability to make mortgage payments.