What is the role of Mortgage Insurance (MI)?

Mortgage Insurance (MI) serves the primary function of protecting the lender against potential losses in the event that a borrower defaults on a loan. When borrowers make a down payment that is less than 20% of the home's purchase price, lenders typically require mortgage insurance to mitigate their risk. If the borrower fails to make their mortgage payments and the house goes into foreclosure, MI covers a portion of the outstanding loan balance, ensuring that the lender does not sustain total losses.

This protection is especially important in high-loan-to-value ratio scenarios, where the likelihood of default can be higher. The presence of MI allows lenders to offer mortgages to borrowers who may not have a significant amount of savings for a larger down payment, thereby expanding access to homeownership.

The other options do not accurately describe the primary purpose of mortgage insurance. While tax benefits can arise from mortgage payments, they are not a direct function of MI. Likewise, MI does not directly affect interest rates nor does it guarantee property appreciation, as property values can fluctuate based on market conditions.