Mortgage Insurance
Insurance that protects the mortgage lender if the borrower defaults on the loan, typically required when the down payment is less than 20% of the home's value. The borrower pays the premiums, but the insurance protects the lender's financial interest in the property.
Example
“Because Maria put down only 10% on her home purchase, she's required to pay $185 monthly for private mortgage insurance until she reaches 20% equity in the property.”
Memory Tip
Remember 'Mortgage Insurance = Money for the lender's Insurance' - you pay it, but it protects the bank, not you.
Why It Matters
Mortgage insurance allows you to buy a home with a smaller down payment, making homeownership accessible sooner, but it adds significant cost to your monthly payment without protecting your interests. Understanding when you can cancel this insurance can save you thousands of dollars over the life of your loan.
Common Misconception
Many homebuyers think mortgage insurance protects them if they can't make payments, but it actually protects the lender if you default on the loan. The insurance doesn't help you keep your home or make payments - it compensates the bank for losses when they foreclose.
In Practice
Kevin buys a $400,000 home with a $40,000 down payment (10% down), requiring private mortgage insurance at 0.58% annually on his $360,000 loan. He pays $174 monthly ($2,088 annually) for PMI. After 7 years of payments and home appreciation, his loan balance drops to $298,000 and the home is worth $465,000, giving him 36% equity. He can now cancel the PMI, saving $2,088 per year. Over those 7 years, he paid $14,616 in PMI premiums that provided him no personal protection.
Etymology
Developed during the Great Depression as part of FHA programs to encourage lending, combining 'mortgage' from Old French meaning 'dead pledge' with 'insurance' meaning protection against loss.
Common Misspellings
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Related Terms
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See Also
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