What does Private Mortgage Insurance (PMI) insure against?

Private Mortgage Insurance (PMI) is designed to protect lenders in the event that a borrower defaults on their mortgage loan, particularly when the borrower makes a down payment of less than 20% of the purchase price. When a borrower brings less than 20% equity into the home, there is a greater risk for the lender if the borrower fails to repay the loan. PMI helps mitigate this risk by covering the lender's potential losses up to a certain amount, specifically focusing on the portion of the loan that exceeds that 20% threshold.

This insurance is particularly important because it allows borrowers who may not have sufficient funds for a larger down payment to still purchase a home. The cost of PMI is typically added to the monthly mortgage payment, and once the borrower achieves a certain level of equity in the home (usually 20% to 22%), they may be able to cancel the PMI.

The remaining options do not accurately reflect the purpose of PMI. For instance, PMI does not cover lost income of a borrower, decreases in home value, or defaults related to student loans, as those concerns are outside the scope of what PMI is intended to protect against. Instead, PMI focuses specifically on mitigating the lender’s risk concerning defaults on mortgage loans.