What is private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is designed specifically to protect lenders in the event that a borrower defaults on a loan, particularly when the borrower has made a down payment of less than 20% of the home's purchase price. When a borrower opts for a lower down payment, the risk for the lender increases, and PMI mitigates that risk by covering a portion of the losses that the lender may incur if the borrower fails to meet their repayment obligations.

The purpose of PMI serves to encourage lending in situations where buyers may not have substantial upfront capital, thus expanding access to homeownership. Lenders feel more secure extending loans to borrowers who cannot provide a large down payment, knowing that PMI will compensate them for potential losses. This insurance does not protect the borrower, cover property damage, or guarantee interest rates, which sets it apart from the other insurance types mentioned in the options.