What is the main purpose of mortgage insurance?

The main purpose of mortgage insurance is to protect the lender if the borrower defaults on the loan. When a borrower makes a small down payment, typically less than 20% of the home's value, lenders require mortgage insurance to mitigate the risk associated with lending a higher amount relative to the property's value. If the borrower fails to make required payments and goes into default, the mortgage insurance provides a layer of security for the lender by covering a portion of the losses incurred.

This form of insurance ensures that lenders can recover some of their financial losses, which encourages them to offer loans to borrowers who may not have a substantial amount of upfront capital. It makes homeownership more accessible, as it allows borrowers to secure a mortgage with a lower down payment while giving lenders the protection they need to take on that risk.