What is the purpose of mortgage insurance?

Mortgage insurance serves a vital function in the lending process, primarily aimed at protecting the lender in the event that the borrower defaults on their loan. When a borrower is unable to make their mortgage payments, the mortgage insurance helps cover the lender's losses, allowing them to recover some of the amount owed even when the property goes into foreclosure.

This form of protection is especially significant for loans that involve a higher risk, such as those with lower down payments. Lenders are more willing to provide loans under these circumstances because the insurance mitigates their risk. Thus, if the borrower fails to fulfill their loan obligations, the mortgage insurance kicks in, providing a safety net for lenders.

While mortgage insurance does not guarantee a profit for lenders, nor does it directly reduce interest rates or cover the cost of closing, its primary role is centered on risk protection in the transaction. This context underscores the importance of mortgage insurance in facilitating homeownership opportunities for borrowers who might otherwise be unable to secure financing due to perceived lending risks.