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

The primary purpose of private mortgage insurance (PMI) is to protect the lender from losses due to borrower default. When a borrower is unable to make their mortgage payments and defaults on the loan, PMI provides financial coverage to the lender, which mitigates their risk. This is particularly important when the borrower has a down payment that is less than 20% of the home's value, as lower equity positions increase the risk of loss for the lender.

In situations where PMI is required, it allows borrowers to obtain financing with a smaller down payment, thus making home ownership more accessible. While it does involve an additional cost, the protection that PMI offers to lenders plays a crucial role in the lending process, as it enables them to approve loans that they might otherwise consider too risky without the insurance in place.

Understanding this function is essential for anyone involved in real estate practice, as it illustrates the dynamics of risk management in mortgage financing. The relevance of this insurance reflects the balance between borrower access to financing and lender risk mitigation.