Final answer:
PMI is designed to cover the lender's financial loss if the borrower defaults on their mortgage. Insurance premiums are payments made for an insurance policy, reflecting the cost of risk protection. Borrowers can reassure banks by offering larger down payments or showing strong financial stability.
Step-by-step explanation:
Private Mortgage Insurance (PMI) is designed to cover the lender's financial loss in case the borrower defaults on their loan. PMI is often required when a homebuyer makes a down payment that is less than 20% of the home's purchase price. It is a form of protection for the lender against the risk associated with a lower down payment. An insurance premium is the amount of money that an individual or business must pay for an insurance policy. The premium is essentially the cost of risk protection and can vary widely based on various factors.
In terms of reassuring a bank on loan repayment, a potential borrower could offer a larger down payment, present a strong credit history, provide proof of consistent income, or even propose additional collateral. These measures help alleviate the imperfections of information and reduce the perceived risk by the lender.