What does PMI stand for, and when is it required?

PMI stands for Private Mortgage Insurance, and it is required when a borrower makes a down payment that is 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. When a borrower puts down less than 20%, the risk for the lender increases, since there is less equity in the home. Therefore, PMI provides a safety net for lenders, allowing borrowers who may not have substantial savings to still qualify for a mortgage.

The requirement for PMI is not determined by interest rate fluctuations or specific loan types like interest-only loans, which distinguishes this correct option. PMI is particularly relevant for conventional loans where lenders want to mitigate risks associated with lower down payments.