What is the purpose of private mortgage insurance?

Private mortgage insurance (PMI) serves a specific function in the realm of financing, particularly for conventional loans. When a borrower purchases a home with a down payment that is less than 20% of the property's value, lenders typically require PMI as a safeguard. This insurance provides a financial safety net for lenders in the event that the borrower defaults on the mortgage.

If a borrower defaults and the home goes into foreclosure, the lender may incur losses from selling the property at a lower value than the outstanding mortgage amount. PMI mitigates these risks by covering a portion of the lender's losses. Therefore, this insurance is crucial in enabling borrowers to secure loans even with smaller down payments, promoting homeownership opportunities while simultaneously protecting the lender's financial interests.

In contrast, the other options pertain to different aspects of real estate and do not accurately describe the function of PMI. For instance, maintenance of rented properties, legal fees for disputes, and guaranteeing equity relate to other forms of insurance or agreements, but they do not align with the specific role that PMI plays in mortgage lending.