insurance

Mortgage Insurance

Insurance that protects lenders against losses when borrowers default on their mortgage loans, typically required when buyers make down payments of less than 20%. This insurance allows lenders to approve mortgages with smaller down payments by reducing their financial risk.

Example

“Because Janet only had a 10% down payment for her home purchase, her lender required private mortgage insurance, adding $180 to her monthly payment until she reaches 20% equity.”

Memory Tip

Remember 'Mortgage Insurance protects the LENDER, not you' - you pay for insurance that protects the bank if you can't pay your mortgage.

Why It Matters

Mortgage insurance enables you to buy a home with less than 20% down, making homeownership accessible earlier in life, but it adds to your monthly costs until you build sufficient equity. Understanding when you can cancel this insurance can save you hundreds of dollars monthly once you reach 20% equity.

Common Misconception

Many borrowers think mortgage insurance protects them from foreclosure or covers their payments if they lose their job. Actually, mortgage insurance only protects the lender from losses if you default - it doesn't help you keep your home or make your payments during financial hardship.

In Practice

Mike buys a $400,000 home with a $40,000 down payment (10% down), resulting in a $360,000 mortgage with 90% loan-to-value ratio. His PMI costs 0.5% annually ($1,800 per year or $150 monthly). After five years of payments and appreciation, his home is worth $450,000 and he owes $320,000, giving him $130,000 equity (29%). At this point, he can request PMI cancellation, saving the $150 monthly fee.

Etymology

The term evolved from basic mortgage lending practices, with formal mortgage insurance programs beginning in the 1930s during the Great Depression. The Federal Housing Administration (FHA) created the first government-backed mortgage insurance to encourage home ownership.

Common Misspellings

morgage insurancemortgage insurencemortage insurancemortgage insuranse

Related Terms

down payment

More in insurance

Other insurance terms you should know

deductibleThe amount you pay out-of-pocket before your insurance begin…insurance premiumThe amount paid periodically to an insurance company in exch…deductibleThe amount a policyholder must pay out of pocket before insu…copayA fixed amount paid by an insured person at the time of a me…coinsuranceA cost-sharing arrangement where the insured pays a percenta…out-of-pocket maximumThe most an insured person will pay for covered healthcare s…