What characterizes private mortgage insurance (PMI)?

Private mortgage insurance (PMI) is designed to protect lenders in the event that a borrower defaults on their mortgage. When a borrower is unable to provide a sufficient down payment, typically less than 20% of the property's value, lenders may require PMI to mitigate their risk. This insurance covers a part of the lender's potential loss when a borrower fails to make their mortgage payments.

The requirement for PMI arises because lower down payments represent higher risk for lenders, as there is less equity in the home to cushion against losses. PMI provides a safety net for the lender, which can help borrowers obtain mortgages that they might not qualify for otherwise due to limited funds for a down payment.

Understanding the nuances of PMI is important for anyone engaging with real estate transactions, as it can affect monthly payments and overall loan costs. It's not included in all mortgage agreements, nor is it voluntary for the borrower if the lender requires it. Additionally, it does not apply specifically to homes with over 50% equity, as PMI is typically mandated when equity is low.