What does Private Mortgage Insurance (PMI) protect?

Private Mortgage Insurance (PMI) is specifically designed to protect the lender in the event that the borrower defaults on the loan. When a borrower puts down a smaller down payment—typically less than 20% of the home's purchase price—PMI provides a safeguard for the lender, allowing them to recover some of their losses if the borrower is unable to make their mortgage payments and foreclosure occurs.

This insurance mitigates the risk associated with lending when the equity is low and enables lenders to offer loans to borrowers who may otherwise not qualify for conventional loan terms due to insufficient down payment. Hence, PMI is an important tool for lenders to manage risk while still providing access to home financing for buyers who may not have substantial upfront funds. The other options do not accurately reflect the role of PMI. For instance, it does not serve to protect the homeowner's investment directly, nor does it offer protection against identity theft or secure the title of the property.