In contrast to homeowners insurance, mortgage insurance (or MI) protects the lender. Mortgage insurance covers a portion of the mortgage to help the lender recoup a percentage of loss in the event of foreclosure.
Not every home loan involves mortgage insurance. Generally, lenders require MI for loans with down payments of less than 20%. If you put 20% or more down on a house, MI probably won’t be part of your conversation with a lender.
But a 20% down payment is a tall order for many of us – especially first-time homebuyers. In 2019, the National Association of Realtors found that first-time homebuyers put down 6% on average. Mortgage insurance can make it possible for would-be homeowners to afford a house sooner, afford a larger range of houses, or save money for other priorities.
MI is offered both by private mortgage insurers (for conventional loans) and by the Federal Housing Administration (FHA). (Full disclosure: Readynest is brought to you by MGIC, a private mortgage insurance company.) Learn more about mortgage insurance here.