MIP is the Federal government's way of insuring against loss due to foreclosure on FHA loans. Prior to the Federal Housing Administration's introduction to the finance community back in the days of FDR's "New Deal", the only financing was typically 75-80% loans from the local bank on one to five year notes, usually with a renewable clause. FHA's intent was to make housing available to those who could not accumulate the 20-25% down payment.

Lower down payments increased risk to the lender. To insure against potential losses, MIP of one-half of one percent on the unpaid balance of the loan was added to the payment and forwarded to the Feds by the mortgage servicer. This fee was called Mutual Mortgage Insurance of MMI.

As a result of record high interest rates that peaked at 18.5% for a 30 year home loan during the early 1980's, foreclosures increased. The solution was to add an UpFront Mortgage Insurance Premium (UFMIP) to the existing MMI.

MMI is automatically added to the payment, while the UFMIP can be paid by the seller, paid by the borrower or financed into the loan.

FHA periodically adjusts premiums as foreclosures improve or worsen.

The current UFMIP is 2.25% for 30 year loans and 2% for 15 year loans. The MMI is currently 1/2% for 30 year loans and 1/4% for 15 year loans.

FHA has played a critical part in providing affordable housing to buyers who may not have been able to own their own home.