What is the purpose of PMI in loans over 80% LTV?

Private Mortgage Insurance (PMI) serves a crucial purpose for loans with a loan-to-value (LTV) ratio exceeding 80%. Specifically, PMI is designed to protect the lender against potential losses in the event that the borrower defaults on the loan. When a borrower is able to provide a down payment of less than 20%, it indicates a higher risk for the lender, as the borrower has less equity in the property. If the borrower defaults and the home needs to be foreclosed, the lender could face significant financial loss given the reduced buffer provided by a smaller equity stake.

PMI mitigates this risk by covering a portion of the lender's loss in such situations, thereby allowing borrowers to access financing even with lower down payments. This protective measure is essential for lenders, as it encourages them to provide loans to a wider range of borrowers who may not have substantial upfront capital.

The other options do not accurately reflect the primary role of PMI. While PMI does not reduce the overall cost of the loan directly, it does relate to risk management for the lender. Similarly, it does not influence the need for escrow accounts or increase borrowing limits, focusing solely on reducing financial risk associated with defaults.