Mortgage Insurance

See: Mortgage. See: Private Mortgage Insurance - PMI.

You’ve had a bumpy financial career. You’ve had a couple bankruptcies, a few divorces, and you’ve skipped out on a couple dinner checks by sneaking out the bathroom window. Now you’re applying for a mortgage, and the banker across from you is flipping through your paperwork with an extremely skeptical look.

You might have to get some mortgage insurance to get the deal done. And in many settings, mortgage insurance in one form or another, is required when buyers of homes put less than 20% down. Why? Bank risk. If there's a 20% cushion, even if the $500,000 home with $100,000 having been put down sells for $415,000, the bank likely gets all or most of its money back.

This product works like normal insurance (like life insurance or car insurance), except that it protects your mortgage lender against the possibility that you default on the loan. If you stop paying (the mortgage equivalent of sneaking out the window), the insurance will reimburse the bank for the cost of the loan. The catch: its costs are not tax-deductible.