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The Purpose of Mortgage Insurance

By Colleen Colkitt

What Is Mortgage Insurance?

Mortgage insurance is beneficial for the lender of a mortgage loan. If a borrower cannot pay their mortgage, the mortgage insurance company reimburses the lender for all, or part of their losses if the home has to be foreclosed and sold by the lender. If the borrower’s down payment is less than 20%, or you’re refinancing more than 80% of the home’s value, it’s required to have mortgage insurance, which is an additional cost to the loan.

If you have a private mortgage loan, check with recent changes in guidelines to make sure you know the maximum loan amount and loan-to-value (LTV) ratio. This premium cost is to benefit the lender, and typically when mortgage insurance is required, the borrower has a fairly low down payment for the loan!

The most common way to pay this premium, is adding amounts to your monthly payments for the loan, which is a monthly premium. Another way is to add the amount to your down payment closing cost and be done with it so you only have to worry about repaying the loan itself.

Why Is It Required?

The insurance is required because in the event of a default, the lender will be out of the entire amount. With mortgage insurance, it protects the lender in the case that the borrower cannot pay the loan in full. If a lender forecloses on a mortgage, it files a claim with the carrier for the mortgage insurance and is paid for the remaining losses up to their policy limit.


Lenders need this protection so that risk for giving out the loan is balanced out by the insurance. Automatic termination of the premium mortgage insurance occurs when the loan has amortized to 78% of the original property value. However, some borrowers that are considered high risk might not be able to end their payments until midway through the loan’s duration.

Although the insurance is protection for the lender, the borrower can be repaid some of this premium in the event they pay their loan in full, or if they’ve paid early. Another reason this protects the borrower as well, is because if you pay your principal payments on time for several years, it will reduce the loan balance and LTV ratio. Also, if the value of your home increases, your LTV ratio decreases, and you won’t have to pay as much for the mortgage insurance!

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