What is private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is a type of insurance that protects lenders against the risk of borrower default on a mortgage loan. When a borrower is unable to put down a substantial down payment, typically less than 20% of the home's value, lenders often require PMI as a safeguard. This insurance allows lenders to recoup part of their losses if the borrower defaults on the loan and the property goes into foreclosure. PMI is particularly important in the context of loans with higher loan-to-value ratios, as it reduces the financial risk for lenders and enables buyers to secure financing with lower down payments.

The other options refer to different types of insurance or requirements. Options that mention coverage for home repairs or guarantees from the federal government pertain to other insurance types, such as homeowners insurance or government-backed loans like FHA or VA loans, which have different insurance mechanisms. The option about insurance required for all mortgages regardless of down payment does not accurately reflect PMI's specific function, which is to protect against default when the down payment is below a certain threshold.