Default Insurance
Insurance coverage that protects lenders against losses when borrowers fail to repay their loans as agreed. This type of insurance is commonly required for mortgages with low down payments and helps reduce the lender's risk of financial loss from loan defaults.
Example
“When Mike put only 5% down on his home purchase, his lender required him to pay for default insurance to protect against the higher risk of foreclosure.”
Memory Tip
Think 'Default = Lender's Fault insurance' - it protects the lender when the borrower can't pay, making lending less risky.
Why It Matters
Default insurance enables lenders to offer loans to borrowers with smaller down payments or higher risk profiles, increasing access to credit. However, borrowers typically pay for this protection, adding to their monthly costs until they build sufficient equity.
Common Misconception
Many borrowers think default insurance protects them if they can't make payments, when it actually protects the lender. Some also believe it's permanent, but most default insurance can be cancelled once the borrower has sufficient equity or meets certain criteria.
In Practice
Lisa buys a $400,000 home with a $20,000 down payment (5% down), creating a $380,000 mortgage. Her lender requires default insurance costing $285 per month. After 8 years of payments and home appreciation, her loan balance drops to $320,000 while her home is worth $480,000, giving her 33% equity. She can now request cancellation of the $285 monthly default insurance premium since she has sufficient equity to protect the lender.
Etymology
The term combines 'default' from Old French 'defaute' meaning failure or lack, with 'insurance' from Latin 'securus' meaning secure, emerging in modern lending practices in the early 20th century.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.