What does private mortgage insurance (PMI) protect against?

• A. The lender's loss if the borrower defaults on a loan
• B. The value of the property decreasing
• C. The borrower's ability to pay the loan
• D. The costs of property taxes

Answer: (A)

Private mortgage insurance (PMI) is designed to protect the lender in the event that the borrower defaults on the loan. When a borrower is unable to make their mortgage payments, PMI ensures that the lender can recover at least a portion of the funds they lent. This type of insurance is especially relevant for borrowers who are unable to provide a substantial down payment, typically less than 20% of the purchase price, as the risk of default is higher in these situations. Therefore, PMI makes it possible for lenders to offer loans with lower down payments while mitigating their financial risk.

The other options do not accurately capture the primary function of PMI. For instance, while a decrease in property value can affect a borrower's equity, it is not something PMI is designed to cover. Similarly, PMI does not provide protection regarding a borrower's ability to pay the loan or take care of property tax expenses. Its sole purpose is to benefit the lender financially in case of default, underscoring its critical role in the mortgage finance landscape.