What is the purpose of mortgage insurance?

Mortgage insurance primarily serves to protect the lender in the event that the borrower defaults on their loan. This type of insurance is especially relevant for loans that require a lower down payment, as it mitigates the risk that lenders take when they grant loans to borrowers with less equity in the property. If a borrower defaults, mortgage insurance allows the lender to recover some of their losses, ensuring they are compensated even if the borrower fails to repay the loan. This added security encourages lenders to extend credit, thus facilitating homeownership for individuals who may not have substantial funds for a down payment.

The other options do not accurately reflect the purpose of mortgage insurance. The first choice about covering property maintenance costs is unrelated to the lender's risk and financial recovery. The guarantee of a home's resale value does not fall under the scope of mortgage insurance, which is specifically designed for lender protection rather than market value assurance. Lastly, reducing the mortgage interest rate does not align with the function of mortgage insurance—interest rates are typically determined by market conditions and individual borrower qualifications, not by the presence of insurance.