What is private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is a type of insurance that primarily protects the lender in the event that the borrower defaults on their mortgage loan. When a borrower is unable to make their mortgage payments, PMI helps to mitigate the financial losses incurred by the lender. This insurance is often required when the borrower's down payment is less than 20% of the home’s purchase price, as it signifies a higher risk for the lender.

PMI allows lenders to offer loans to borrowers who may not have a significant down payment, thus making home ownership more accessible. In this arrangement, the cost of the PMI is typically added to the monthly mortgage payment or can sometimes be paid upfront at closing.

Understanding the function of PMI is crucial for both borrowers and lenders, as it serves as a safety net for lenders, ultimately enabling them to approve loans with lower down payments while also protecting their investments. This is why the correct answer focuses on the role of PMI in safeguarding the lender.