Mortgage Insurance Explained

It’s difficult to know how to explain mortgage insurance, as it is both terribly simple and very complicated. It depends upon the level of detail you are looking at. At the simplest level mortgage insurance covers the risk that you don’t make the payments on your loan. Technically this is known as “default” and if it goes on long enough then the lender will take your house away from you. They will then sell it to try and get back the money they lent you for the mortgage.

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Mortgage insurance is explained, therefore, as protecting them from making a loss if this should happen. If the amount they can get from selling the house is less than what is still owed, then the insurance company pays them. Now these sorts of sales (sometimes called repossessions) are usually done quickly and the bank can often end up getting less than the best market value for the property. A discount of 10% is not unusual. This is why lenders insist upon mortgage insurance if the deposit is less than 20% of the value of the house (although there are ways around this, such as an 80/20 option). In fact they have insisted so much that it is now law that there must be this insurance.

Why, if it is this simple, is it difficult to explain mortgage insurance? Because in the details, it can get very complicated. For example, If you have mortgage insurance, and then over the years you have paid off some of the principal loan amount, then the insurance (and your need to pay the premiums) stops once the loan is less than 78% of the value of the house. Or if house prices have risen strongly to get to the same point. The forms and procedures for dealing with this can be very complex indeed, which is why explaining mortgage insurance in full is rather difficult.