What is the primary purpose of private mortgage insurance (PMI)?

Private mortgage insurance (PMI) serves the essential function of protecting the lender in the event of borrower default. When a borrower is unable to make their mortgage payments, PMI mitigates the financial risk that the lender faces by ensuring they can recover some of their losses. This is particularly important when borrowers make a down payment of less than 20% of the home's purchase price, as they are considered higher-risk borrowers.

By having PMI, lenders can offer loans with lower down payments, which increases access to homeownership for many individuals who may not have sufficient savings for a larger down payment. The cost of PMI is typically added to the monthly mortgage payment, and it may be required until the borrower has built enough equity in the property.

Understanding the function of PMI is crucial because it underscores the lender's perspective in the mortgage lending process and the considerations that come into play when determining loan terms. This knowledge also helps borrowers make informed decisions about their mortgage options and the necessity of such insurance based on their financial situations.