Wisconsin Real Estate Sales Practice Exam

What is the primary purpose of private mortgage insurance?

1. To protect the borrower

2. To secure the lender's investment

3. To lower interest rates

4. To facilitate a home inspection

The correct answer is: To secure the lender's investment

The primary purpose of private mortgage insurance (PMI) is to secure the lender's investment. This insurance is typically required when a borrower makes a down payment that is less than 20% of the property's purchase price. By having PMI in place, the lender is protected against potential losses in the event that the borrower defaults on the loan. This protection reduces risk for lenders, enabling them to offer loans to borrowers who might not qualify for conventional financing due to smaller down payments. Essentially, PMI allows lenders to mitigate their risk while allowing borrowers to access home financing more easily, thus encouraging home buying even when borrowers have limited equity. While the other choices mention aspects related to borrowing and investing, they do not accurately capture the function of PMI in the lending process. For example, protecting the borrower, lowering interest rates, and facilitating home inspections are not the primary functions of PMI, which is concisely focused on providing a safeguard for lenders against potential losses.