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

Private Mortgage Insurance (PMI) serves a critical role in the mortgage landscape, particularly for borrowers who are unable to make a substantial down payment, typically less than 20% of the property's purchase price. The primary purpose of PMI is to protect the lender in the event that the borrower defaults on the loan. If a borrower stops making payments and the lender is forced to foreclose, PMI helps to cover a portion of the lender's losses, thereby reducing the risk associated with lending to higher-risk borrowers.

By providing this safety net, PMI allows lenders to offer loans to individuals who might not qualify otherwise due to a lower down payment. This can make homeownership accessible to more people. While PMI can add to the monthly costs of a mortgage, it is a valuable tool for facilitating lending and home purchases, especially for first-time buyers or those with limited savings.

The other options do not reflect the purpose of PMI. Covering property taxes is unrelated, as PMI specifically pertains to loan default protection. PMI does not directly impact interest rates or simplify the mortgage process; instead, it allows for loans to be made with lower down payments while maintaining lender security.