The term “mortgage insurance” can be a bit confusing; this video might help. Mortgage insurance covers the lender, not the homebuyer, but mortgage insurance premiums are paid by the homebuyer. Confused? Read on.
If a home buyer can’t make a large enough down payment, the lender is taking a bigger risk that they might not be repaid. It’s a silly example, but if you made a $1 down payment on a $1M dollar house, you wouldn’t have a very big reason to stick around if market conditions or personal situations go bad.
In general, if the down payment is under 20% of the loan (including that $1 down payment), the lender wants insurance that they will be repaid.
So you, the buyer, agree to pay mortgage insurance because the lender is taking a bigger risk. If the borrower can’t repay, the lender might foreclose on the property, and file a claim with the mortgage insurer for losses.
If mortgage insurance comes up in your loan shopping, ask about FHA programs; there may be options that help you.
If you do take a loan that requires mortgage insurance, keep track of your equity. You will probably have the option of dropping mortgage insurance when your equity is high enough.