It should not be confused with mortgage life insurance that pays the balance of the mortgage in the event of the borrowers death, and it should not be confused with homeowner or hazard insurance that pays for physical losses to the property and contents.
Mortgage insurance protects the lender against a portion of a loss in the event of a defaulted loan.
That down payment was sufficient to provide the lender with sufficient equity in the event the borrowers defaulted on the loan. The lender would foreclose and the loss would be minimized by that equity. The mortgage insurer protected the lender against a portion of the loss in a defaulted mortgage, thereby reducing the lender s risk to an acceptable level. There are several private mortgage insurers in the industry. Although the lender usually coordinates the process of obtaining mortgage insurance, the borrower may select the mortgage insurer if desired.