Function

• By backing mortgages, the FHA is putting itself on the line in case the borrower defaults on the loan. To protect itself, the FHA charges mortgage insurance premiums from people who take out FHA-backed loans. These premiums are then used to reimburse lenders when borrowers default.
  
  

Types

• The FHA charges an up-front mortgage insurance premium and a monthly mortgage insurance premium. The up-front mortgage insurance premium must be paid at the time the loan is taken out or can be rolled into the amount being borrowed. The monthly mortgage insurance premium is added to the monthly mortgage payment. These monthly payments continue until certain equity levels are reached.
  
  

Size

• The cost of the up-front mortgage insurance premium is set to increase to 2.25 percent from 1.75 percent in 2010. The cost is about 0.5 percent of the loan's value per year. The FHA has requested that it be allowed to increase the maximum rate, 0.55 percent per year as of 2010, but cannot do so without congressional approval.
  
  

Time Frame

• People who take out an FHA loan must pay the monthly mortgage insurance if the down payment is less than 10 percent on loans with terms of 15 or fewer years or 20 percent on loans with a term greater than 15 years. Borrowers must continue to pay monthly mortgage insurance premiums until they reach 22 percent equity in the home. In addition, if the mortgage has a term greater than 15 years, monthly mortgage insurance premiums must be paid for at least five years even if 22 percent equity is achieved before that time.
  
  

Benefits

• During tougher economic times when credit is scarce, having the FHA back a mortgage can be a major help in securing the financing for your home. According to CNN, in 2009 about 30 percent of home purchases and 20 percent of mortgage refinances were FHA loans. In addition, CNN reports that almost half of first-time home buyers use FHA loans to assist them in getting financing.