If the borrower defaults and the lender takes title to the property, the mortgage insurer reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower. Mortgage insurance should not be confused with mortgage life insurance, which provides coverage in the event of a borrower's death, or homeowner's insurance, which protects the homeowner from loss due to damage from fire, flood or other disaster.
All home buyers can benefit.
First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses. This large down payment assures the lender that the borrower is committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment. A low down payment also allows borrowers to purchase more home than they might otherwise be able to afford.