Why does FHA charge upfront Mortgage Insurance Premiums? (MIP)

FHA was created by the Federal Government to provide affordable housing financing for qualified borrowers. FHA doesn't actually lend, they just insure the loan, eliminating the lender's risk. The borrower pays a small upfront insurance premium, called MIP, which is added to the loan amount. The borrower also pays a small monthly mortgage insurance premium. These funds go into a default pool that covers any foreclosures.  All FHA borrowers pay into this fund.

With families turning to FHA in record numbers, the agency is on pace through its expansions to help over 500,000 families refinance into its affordable mortgages by the end of this year.

FHA mortgage insurance premiums (MIP) maintain reserves that insure the FHA system. With all borrowers paying into the reserves, the program is stronger and available to more borrowers.  If there were no insurance premium, FHA loans would be much less available.  FHA accepts borrowers that are higher credit risks than Fannie Mae and Freddie Mac. In fact, FHA has become an alternative to subprime type of loans that would have much higher interest rates and costs over all.

“Charging borrowers a fair mortgage insurance premium means that they pay their own way, allows FHA to reach more borrowers, and helps create a more financially sound FHA.  That’s good news since FHA, like any other insurance company, supports its flagship program through its premiums - not taxpayer dollars,” said Assistant Secretary for Housing - Federal Housing Commissioner Brian D. Montgomery.

The FHA Mortgage Insurance Premium (MIP)

FHA MIP is similar to the private mortgage insurance required for conventional mortgages but there are some differences.

Up-front fees: Unlike conventional mortgage insurance, MIP requires a 1.75% up-front fee. The fee is included in the loan, so you pay it over the life of the loan.

Rate: The FHA mortgage premium is only .5% of the loan amount per year, divided over 12 months, which becomes a small part of the monthly mortgage payment. Private insurance has varying rates and can have a much higher monthly payment.

Removal:  MIP is mandatory for the first 5 years for 30 yr fixed terms. After the 5th year, the mortgage premium can be removed.

How the MIP Affects Your Loan Decision
Most people want to avoid paying any mortgage insurance which is understandable.  But if you don't have 20% equity in the property you will have to pay it for any loan, whether it's from the FHA, Fannie Mae, or Freddie Mac.