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

Private mortgage insurance (PMI) plays a crucial role in the home financing process, especially for borrowers who cannot provide a 20% down payment on a conventional loan. The primary purpose of PMI is to protect the lender against the risk of borrower default. When a borrower puts down less than 20%, the risk of default increases from the lender's perspective; PMI mitigates that risk by providing insurance coverage. In the event that the borrower fails to make payments and the home goes into foreclosure, the PMI compensates the lender for their losses.

This safety net gives lenders the confidence to extend credit to borrowers who might otherwise be seen as higher-risk, facilitating access to homeownership for more individuals. It’s important to note that while PMI protects the lender, it does impose an extra cost on the borrower, often included in their monthly mortgage payments. It does not provide direct assistance to the borrower, lower the interest rate, or help in facilitating home repairs. Thus, the choice that accurately represents the core purpose of PMI is its role in safeguarding lenders against potential losses due to defaults.