Mortgage Insurance

Lenders take more risk when borrowers put down a small deposit, because if the borrower defaults and property prices fall, selling the property may not cover the loan. Mortgage insurance compensates the lender for some of this loss.

In the United States, conventional mortgages with a deposit of less than 20% usually require private mortgage insurance. It is typically paid monthly as part of the mortgage payment and can usually be cancelled once the borrower's equity reaches 20% of the home's original value, and is automatically removed at 22% under federal law. Government-backed loans, such as those from the Federal Housing Administration, have their own mortgage insurance premiums.

For example, a buyer purchasing a 300,000 home with a 10% deposit might pay an extra monthly amount for mortgage insurance until they have built up enough equity.

Other countries have similar arrangements. Canada requires mortgage default insurance for deposits below 20%, and Australia uses lenders mortgage insurance. In the United Kingdom, lenders usually charge higher interest rates on high loan-to-value mortgages rather than requiring separate insurance. Mortgage insurance should not be confused with mortgage protection insurance, which pays the borrower's mortgage if they die or become ill.