Published: | Updated: September 11, 2016

Definition - What does Defeasance mean?

Defeasance is a circumstance in which a debt or a bond is cancelled or voided due to the fact that the borrower has set aside enough money to pay it.

Mortgage insurance can often be cancelled if defeasance takes place, since there is no more risk of the borrower defaulting.

Insuranceopedia explains Defeasance

Defeasance is a positive situation for the borrower because it means that their debt will be completely covered.

It is often a good situation for the lender as well since it means that they do not risk losing money through the borrower defaulting. An insurer can lose a policyholder, however, if the insurance policy is cancelled due to the risk being completely mitigated through defeasance caused by the borrower.

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