What is Mortgage Insurance?

On a home mortgage, the interest rate is a reflection of the lender's perceived risk of loss. The higher the risk of loss, the higher the interest rate. In simpler terms, if you own a home and don't pay the mortgage, the lender's remedy is to foreclose on the home. In a foreclosure, the lender hopes to recover what is owed on the loan, plus the costs (attorney's fees and court costs) associated with the foreclosure process. If you don't have much equity in the property and it goes to foreclosure, the lender's risk of loss is higher (i.e., the proceeds from the sale of the property don't cover the lender's total costs).

To offset the risk of loss when borrowers don't have much equity, lenders require that borrowers purchase Mortgage Insurance.

There are different types of mortgage insurance. For conventional loans, there is Private Mortgage Insurance (PMI, also known as Borrower-Paid MI) and Lender-Paid Mortgage Insurance (also known as LPMI). FHA loans also require mortgage insurance, but that insurance is paid to the government (HUD [Housing and Urban Development]). VA loans are guaranteed by the government; there is an up-front VA Funding Fee (a percentage of the loan amount that varies according to several criteria), but NO MONTHLY MORTGAGE INSURANCE.