Let's start with the basics - what is mortgage insurance?
Many homeowners feel mortgage insurance is imposed on them by banks for no reason and they don't benefit from it in any way. The reality is that without mortgage insurance, many of those same people would not be homeowners.
I feel it is important to note that this post is not about homeowner's insurance, which is required on all mortgaged properties and protects the home and its contents against loss.
Mortgage insurance covers a lender in the event of a foreclosure. Most homes that go into foreclosure sell for less than market value, so if a homeowner doesn't have much stake in a home, the lender is the one who actually loses money. This is where mortgage insurance comes into play. On purchases with less than 20% down payment or refinances with less than 20% equity in the home, a homeowner obtains a mortgage insurance policy to cover the lender in the event of a foreclosure.
Without mortgage insurance, one of two things would happen: