What does mortgage insurance do?

Mortgage insurance is designed primarily to protect lenders from potential loss when a borrower defaults on their mortgage loan. This type of insurance is particularly important for loans that have a down payment of less than 20% of the property’s purchase price, as it mitigates some of the risk that lenders face in these scenarios. By having mortgage insurance in place, lenders can recoup part of their losses if the home goes into foreclosure and the sale of the property does not cover the remaining balance owed on the mortgage.

The other options present different types of coverage or financial guarantees that are not related to mortgage insurance. Insurance for the homeowner's property against damages, for instance, is typically covered by homeowners insurance, which safeguards the physical structure and personal belongings against risks such as fire, theft, or natural disasters. Guaranteeing the loan amount to the borrower does not align with the purpose of mortgage insurance, as that would imply financial backing to the borrower rather than protection for the lender. Lastly, covering the cost of property taxes is a separate financial obligation entirely and is not managed through mortgage insurance, which focuses strictly on lender protection in case of borrower default.