What does private mortgage insurance protect a lender against?

Private mortgage insurance (PMI) serves as a safeguard for lenders in the event that a borrower defaults on their loan. When a borrower puts down less than 20% of the home’s purchase price, lenders often require PMI as a way to mitigate their financial risk. If the borrower fails to make their mortgage payments and the property is foreclosed, the PMI helps cover the lender's losses.

This protection is particularly important for lenders, as it allows them to extend loans to borrowers with smaller down payments while still having a form of risk management in place. The intent of PMI is to encourage lending by offering security to lenders against potential financial losses from borrower defaults.

Other options, such as increased property taxes or market fluctuations, do not directly relate to the specific risk that PMI addresses. Changes in interest rates also fall outside the scope of what PMI covers, as it is focused solely on the risk associated with the borrower’s ability to repay the loan. Therefore, the rationale behind PMI is squarely about protecting lenders from the potential losses incurred due to borrower default.