What is private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is specifically designed to protect lenders in the event that a borrower defaults on their mortgage loan. When a borrower is unable to make their payments, PMI provides the lender with a financial safety net, reducing their risk. This insurance typically comes into play when the borrower contributes a down payment of less than 20% of the home's purchase price. As a result, the lender requires PMI to safeguard their investment against potential losses due to default.

This mechanism is particularly essential in the housing market because it enables homebuyers to secure loans even with lower down payments, making it more accessible for individuals to enter the market. While PMI benefits the lender, it does not provide any direct financial protection to the borrower themselves. Thus, understanding the nature and purpose of PMI is crucial for both lenders and potential homeowners.