In case the mortgagor or the borrower, by any circumstances commits a fault of any sort, the mortgagee will have to suffer all the consequences the event has incurred. So to protect the lender or the mortgagee from any mishaps, mortgage insurance was devised. Aside from serving the purpose of protecting the mortgagee, mortgage insurance is also used in loans with a value of 80% or more (loan-to-value), in case of repossession or foreclosure and with many other things.

As a rule, the borrower (not the lender) pays the mortgage insurance. He may do this either as itemized components, which is paid monthly or one lump sum up front. For the former case, the borrower can stop paying the mortgage insurance policy if he informs the lender of the property's appreciation or when the loan is already fully paid. Typically, an initial premium must be paid at closing, the amount of which will depend on the coverage and the mortgage insurance policy the borrower chose.

In case of repossession, the mortgagee (e.g. banks and investors) can sell the property to claim back the money lent or betterly known as investment. Usually, they dispose the hard assets by dramatically lowering down the price of the mortgage. The mortgage insurance will then take its part to pay the real value of the mortgage in the event that it was not recovered fully by the lender.

Mortgage insurance policies help in sharing the risks of lending money to the borrower. In effect, it reduces and for some, even eliminates the loss of the lenders. Mortgage insurance is different from mortgage life insurance and from homeowner's insurance.
Mortgage life insurance is a policy that protects the mortgage in case of the death of the borrower. Homeowner's insurance on the other hand, provides coverage in the event of fire, earthquake and other disasters, depending on the terms of the policy.

Many homebuyers claim great benefit from mortgage insurance, and they have good reasons to do so. This policy allows them to buy their own homes and can also increase their capacity to buy more. From a homebuyer's point of view, this really is a great privilege.

To move further, another great privilege offered by mortgage insurance is that firs-time homebuyers can use a lowered down payment to buy their homes. Consequently, they will be allowed to buy a more expensive home soon. For repeat homebuyers however, they can initiate lower down payment on their next purchase and can have lowered tax rates since they can access to more deductible interests. In effect, the cash they should have paid for the real value of the house may then be used for other expenses such as moving costs and other forms of investments.

On the most normal circumstance, lenders will have to down a payment of 20% of the price of the purchased home. This payment will assure the mortgagee that the mortgagor is committed to continuing his investment. In effect, this down payment will tie the borrower to the agreement. Often, twenty percent of the item's value would mean years of saving on the borrower's part. However, with mortgage insurance the borrower may be saved from this down payment and may be allowed to pay only a minimum of 5% to 10% of the actual initial value. This is a more affordable bracket for most borrowers and provides the mortgagee broader options in saving as much money.

You see, the principle is simple in mortgage insurance. It does not only provide protection for both parties; it may also increase the borrower's capacity to purchase a home.