What does a mortgage insurance premium (MIP) provide?

A mortgage insurance premium (MIP) is specifically designed to provide coverage for the lender in the event that the borrower defaults on the loan. When a borrower makes a down payment that is less than 20% of the property’s value, lenders require MIP as a safeguard. This insurance helps protect the lender's investment, reducing their risk when lending money that is not fully secured by equity in the property.

This becomes particularly important in scenarios where the borrower may be unable to fulfill their payment obligations. If default occurs, MIP can compensate the lender for some of the losses incurred. It is distinct from property insurance, which protects against physical damage to the property, and does not relate to tax deductions or the cost of property inspections. Thus, understanding the purpose of MIP is crucial for grasping risk management in mortgage lending.