What does PMI stand for, and when is it required?

What does PMI stand for, and when is it required?

• A. Public Mortgage Insurance; when interest rates rise
• B. Private Mortgage Insurance; when the down payment is less than 20%
• C. Primary Mortgage Insurance; for all conventional loans
• D. Private Mortgage Insurance; for interest-only loans

Answer: (B)

PMI stands for Private Mortgage Insurance, and it is required when a borrower makes a down payment that is less than 20% of the home's purchase price. The purpose of PMI is to protect the lender in case the borrower defaults on the loan. When a borrower puts down less than 20%, the risk for the lender increases, since there is less equity in the home. Therefore, PMI provides a safety net for lenders, allowing borrowers who may not have substantial savings to still qualify for a mortgage. The requirement for PMI is not determined by interest rate fluctuations or specific loan types like interest-only loans, which distinguishes this correct option. PMI is particularly relevant for conventional loans where lenders want to mitigate risks associated with lower down payments.

PMI stands for Private Mortgage Insurance, and it is required when a borrower makes a down payment that is less than 20% of the home's purchase price. The purpose of PMI is to protect the lender in case the borrower defaults on the loan. When a borrower puts down less than 20%, the risk for the lender increases, since there is less equity in the home. Therefore, PMI provides a safety net for lenders, allowing borrowers who may not have substantial savings to still qualify for a mortgage.

The requirement for PMI is not determined by interest rate fluctuations or specific loan types like interest-only loans, which distinguishes this correct option. PMI is particularly relevant for conventional loans where lenders want to mitigate risks associated with lower down payments.