What is the purpose of Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) serves as a crucial financial tool designed to protect lenders when borrowers are unable to provide a substantial down payment. When a borrower makes a down payment that is less than 20% of the home's purchase price, lenders perceive a higher risk of default. PMI mitigates this risk by guaranteeing a portion of the loan to the lender in the event of loan default, allowing the lender to recoup some losses.

By requiring PMI, lenders can offer loans to borrowers who would otherwise be unable to afford a home due to limited savings for a larger down payment. Thus, PMI effectively enables borrowers to secure financing with a smaller down payment, increasing accessibility to homeownership.