Freddie Mac CreditSmart Homebuyer U Practice Test

The primary purpose of private mortgage insurance (PMI) is to protect the lender in case of default. This insurance is required by lenders when a borrower is unable to make a substantial down payment, typically less than 20% of the home's purchase price. By requiring PMI, lenders mitigate their risk, as this insurance covers a portion of the loss that the lender may incur if the borrower defaults on the loan. Essentially, PMI acts as a safeguard for lenders, reassuring them that their investments are protected, even when a borrower may have a lower equity stake in the property. The other options do not accurately reflect the purpose of PMI. While borrowers may look for ways to manage their finances and safeguard their interests, PMI specifically exists to protect the lender, not the borrower. It does not serve to reduce interest rates or cover closing costs, which are separate elements in the mortgage process. Understanding the specific role of PMI can help potential homebuyers make informed decisions about their mortgage options and associated costs.