What does PMI stand for in the context of mortgage insurance?

PMI stands for Private Mortgage Insurance in the context of mortgage insurance. This type of insurance is typically required by lenders when borrowers put down 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, as a lower down payment represents a higher risk for the lender. By requiring PMI, lenders can mitigate that risk and still provide loans to borrowers who may not have substantial savings for a larger down payment.

Private Mortgage Insurance is distinct from other types of mortgage insurance, as it is offered by private companies rather than being government-backed. This characteristic ensures that the terms and costs of PMI can vary depending on the lender and the specific circumstances of the borrower. Understanding PMI is crucial for prospective homebuyers, especially those who may be entering the market with a smaller down payment, as it can impact overall mortgage costs.