What is the primary purpose of mortgage insurance?

The primary purpose of mortgage insurance is to protect lenders from borrower default. When a borrower takes out a mortgage with a down payment that is less than 20% of the home's purchase price, lenders typically require mortgage insurance. This form of insurance mitigates the risk to the lender in case the borrower fails to make mortgage payments. In the event of default, the insurance pays the lender a portion of the outstanding loan balance, thereby reducing their risk and allowing them to offer loans to borrowers who might not otherwise qualify for a mortgage. This is particularly important because it helps to ensure that lenders remain willing to extend credit to a broader range of borrowers, facilitating home purchasing opportunities.

Other options like reducing interest rates, paying property taxes, or covering title insurance costs do not align with the fundamental role of mortgage insurance. While these could be related to different aspects of mortgage lending, they do not serve the protective function inherent to mortgage insurance for lenders in the event of borrower default.