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

Private Mortgage Insurance (PMI) serves the essential function of protecting lenders from financial losses that may occur if a borrower defaults on their mortgage. Typically, PMI is required when a borrower makes a down payment that is less than 20% of the home’s purchase price. This insurance mitigates the lender's risk by providing a guarantee that they can recover part of the loan amount, even if the borrower fails to make their mortgage payments.

The presence of PMI allows lenders to offer loans to borrowers who may not have significant savings for a large down payment, thus expanding access to homeownership. While PMI does not influence the appraisal of the property or verify the borrower’s creditworthiness, it directly addresses the risk management aspect for lenders, making it a crucial element in mortgage lending when equity is lower.