What is the primary purpose of private mortgage insurance?

Private mortgage insurance (PMI) serves a specific function in the lending process by protecting lenders against potential losses that may occur if a borrower defaults on their loan. When a borrower makes a down payment of less than 20% on a home, lenders often require PMI as a safeguard. This insurance helps mitigate the risk for lenders, allowing them to approve loans for borrowers who might not otherwise qualify due to a lower down payment.

By offering this protection, PMI encourages more individuals to enter the housing market, as it enables them to secure a mortgage without the need for a substantial down payment. Consequently, this opens the door for homeownership opportunities that might have otherwise been unavailable. The presence of PMI helps keep the lending environment stable, as it reduces the financial risk for lenders associated with lower equity positions in the loan.

The other options do not accurately reflect the primary function of PMI. Although PMI does not affect interest rates, increase borrowing limits, or specifically simplify the mortgage process, its main role is to provide insurance for lenders against potential loan defaults. This risk management tool plays a crucial role in facilitating more accessible mortgage financing.