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

The primary purpose of Private Mortgage Insurance (PMI) is to protect the lender when a borrower defaults on their mortgage. PMI is typically required for borrowers who are unable to make a down payment of at least 20% of the home's purchase price. In cases where the borrower does default, PMI ensures that the lender is compensated for a portion of their loss, thus mitigating risk associated with higher loan-to-value ratios. This insurance provides a security blanket for lenders, encouraging them to lend to borrowers who may otherwise not qualify for a conventional mortgage due to the smaller down payment.

Other options do not accurately reflect the role of PMI. For instance, while lowering interest rates for borrowers might be a goal of other financial products, it is not the function of PMI. Similarly, insuring a property against damage is typically managed through homeowner's insurance, not PMI. Lastly, covering property taxes in the event of foreclosure does not align with the purpose of PMI, which is strictly focused on loan default liability rather than tax obligations. Thus, the role of PMI is essential in facilitating home ownership for borrowers with lower down payments by providing safeguards for lenders.