What is the primary function of mortgage insurance?

The primary function of mortgage insurance is to protect the lender from the risk of default and foreclosure. When a borrower is unable to repay their mortgage, the lender faces potential financial loss. Mortgage insurance mitigates that risk by providing a financial safeguard; if the borrower defaults, the insurance pays a portion of the lender's losses. This insurance is especially common for loans where the borrower is making a smaller down payment, typically less than 20% of the home's value.

Additionally, while options like reducing interest rates for borrowers or increasing home value may seem beneficial, they do not align with the core purpose of mortgage insurance. It serves primarily as a risk management tool for lenders rather than as a direct benefit to borrowers in terms of loan terms or property value. Protecting against overvaluation does not relate to the function of mortgage insurance; instead, property appraisals and market assessments address valuation concerns.