For those of you that have purchased a home before, you may be vaguely familiar with this term. But for those who are looking to buy their first home, the term “mortgage insurance” may not be ringing any bells.

So what exactly is mortgage insurance? In simple terms, mortgage insurance is a premium that the buyer pays to the bank in order to insure the mortgage they gave you. In even simpler terms, you are paying an insurance premium on the bank’s mortgage. Why? For starters, mortgage insurance is only paid when you are putting less than 20% down on a home purchase (or when your mortgage is greater than an 80% Loan-to-Value/LTV ratio). Please note that this may vary depending on the loan type.

Again, why? Basically, the bank has set a line of risk for itself; that line sits at 80%. If you put 20% down (or more) on the purchase of your new home, you are considered less risky in the eyes of the bank. If you put less than 20% down, you are considered more risky. In the bank’s experience, those who are considered “more risky” have a higher risk of loan default (e.g. you stop paying your mortgage). Because of this default risk, the bank wants you to pay for the insurance on their loan.

Now that you know what Mortgage Insurance is (a.k.a. MI or PMI), check out this recent article that discusses how to get rid of it if the bank is forcing you to pay. Please also feel free to shoot me any additional questions.