Which term refers to the insurance that allows for default protection on loans?

The term that refers to the insurance providing default protection on loans is Private Mortgage Insurance (PMI). PMI is typically required when borrowers put down less than 20% on their home purchase, and it serves to protect lenders in the event the borrower defaults on the mortgage. This type of insurance is crucial in allowing lenders to feel more secure in offering loans to individuals who may not have sufficient equity in their homes from the start.

PMI helps facilitate homeownership by making it possible for individuals with limited funds for a down payment to qualify for a mortgage. The cost of PMI is usually added to the monthly mortgage payment, and once the borrower reaches a certain amount of equity in the home, they can request the cancellation of PMI, further enhancing the affordability of homeownership.

While other insurance types mentioned, such as Loan Guaranty Insurance, may provide some level of protection, they often relate to specific programs or guarantees set by federal entities and aren’t as widely applicable to conventional loans as PMI is. Thus, the specific application and broad use of PMI make it the correct choice in the context of default protection for typical mortgage loans.