What Is Mortgage Insurance and Do I Need Mortgage Insurance?

The Definition of Mortgage Insurance

Mortgage Insurance (also known as mortgage guarantee and home-loan insurance) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer.

What Is Mortgage Insurance?

Mortgage insurance is required by individuals who are purchasing homes that have less than 20% to use for making a down payment.  Mortgage insurance protects the bank against the borrower not making their monthly mortgage payments.

But what if I will always make my payments?

The reality is people default on their mortgages.  Since mortgages are a cornerstone of the economy, we need to protect the lenders and ensure that mortgages are always available to individuals.

How Do I Pay for My Mortgage Insurance?

Typically there will be a premium – similar to an auto insurance premium that will be added to your monthly mortgage payment.  If you are purchasing a home for a few hundred thousand dollars, your total payment will be to cover the loan payment plus the premium.

What Is the Difference between Mortgage Insurance and Mortgage Life Insurance?

There is often some confusion between mortgage insurance and mortgage life insurance.  The difference between the two is:

  • Mortgage life insuirance results in your mortgage being paid off in the result of your death
  • Mortgage insurance protects the lender in the event of you not making your payments

How did Mortgage Insurance Begin?

Mortgage insurance dates back to WWII and all of the military men coming back from the war and looking to settle down and buy homes, however most of the soldiers did not have enough money for the down payments.

Back then, the standard was ultimately a 50% down payment!  The bankers were not prepared to take on the risk of the low down payments.  However the government did not want to prevent these people from purchasing a home so the government said they would provide the insurance and protect the banks against loses and thus, mortgage insurance was born.

Selling Mortgage Insurance

Mortgage insurance is typically sold by brokers when you take out your mortgage, however, you can purchase mortgage insurance after the fact – even on a loan in which you put down 20% or more.  There are many people who sell mortgage insurance and they will typically cold-call home owners and make their pitch.

Do I need mortgage insurance?

Typically the only people who carry mortgage insurance are those that are required to have it as part of their loans due to the down payment size.  You may consider purchasing mortgage insurance if you are in an unstable job or a job that has a high risk of injury or disability.