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

PMI stands for Private Mortgage Insurance, and it is a type of insurance that protects the lender in case the borrower defaults on the loan. It is generally required when the loan-to-value (LTV) ratio exceeds 80%, meaning that the borrower has made a down payment of less than 20% of the home's purchase price.

The necessity for PMI arises because a higher LTV indicates a higher risk for the lender; the borrower has less equity in the home. By requiring PMI, lenders can mitigate this risk, ensuring they have financial coverage should the borrower fail to make payments. This regulation helps facilitate home buying for individuals who may not have a substantial down payment but still qualify for a loan.

In contrast, the other options do not accurately capture the definition or context of PMI's application. For instance, public mortgage insurance and primary mortgage insurance are not terms relevant to the typical home financing process. Fixed-rate mortgages are not a criterion for PMI requirements; it primarily relates to the size of the down payment and the LTV ratio.