Eli5 why PMI exists.

Question

I don’t understand how making me pay an extra 500$ a month makes me MORE likely to not default on my loan. I live in Southern California and to put 10% down on a house it costs like 170k at least. Anyways I’d love to know why it’s mandatory I pay PMI.

In: 0

Answer 1

The “I” stands for Insurance. You’re paying an insurance premium on a policy that a third party has sold to your bank that pays off if you default. This defrays the bank’s risk and allows them to lend to more risky buyers – Namely those with less than 20% equity in the home