What does private mortgage insurance protect against?

What does private mortgage insurance protect against?

• A. Natural disasters affecting properties
• B. Defaults on a mortgage
• C. Market fluctuations
• D. Loan payment delays

Answer: (B)

Private mortgage insurance (PMI) is specifically designed to protect lenders against defaults on a mortgage. When a borrower is unable to make the required mortgage payments and defaults, PMI provides financial protection to the lender. This is particularly important for loans where the borrower has a down payment of less than 20% of the property’s purchase price, as this represents a higher risk for lenders. PMI ensures that the lender can recover a portion of the losses incurred from the default, making it easier for them to extend credit to borrowers who may not have substantial down payments. In the context of the other options, natural disasters typically fall under hazard insurance and not PMI; market fluctuations affect property value but are not covered by PMI; and loan payment delays, while they might create challenges for lenders, are not directly addressed by PMI either. Thus, understanding that PMI is a safeguard against mortgage default clarifies its purpose in the financing landscape.

Private mortgage insurance (PMI) is specifically designed to protect lenders against defaults on a mortgage. When a borrower is unable to make the required mortgage payments and defaults, PMI provides financial protection to the lender. This is particularly important for loans where the borrower has a down payment of less than 20% of the property’s purchase price, as this represents a higher risk for lenders. PMI ensures that the lender can recover a portion of the losses incurred from the default, making it easier for them to extend credit to borrowers who may not have substantial down payments.

In the context of the other options, natural disasters typically fall under hazard insurance and not PMI; market fluctuations affect property value but are not covered by PMI; and loan payment delays, while they might create challenges for lenders, are not directly addressed by PMI either. Thus, understanding that PMI is a safeguard against mortgage default clarifies its purpose in the financing landscape.