FHA Mortgage Insurance Premium vs PMI: Key Differences

An FHA mortgage insurance premium (MIP) and conventional PMI (private mortgage insurance) both protect the lender if you default, but they differ sharply in cost, cancellation rules, and when switching to a conventional loan makes financial sense. Understanding these differences can save thousands in interest and premiums over the life of a loan.

The Cost Breakdown: Upfront vs. Monthly

If you put down less than 20% on a conventional loan, your lender requires PMI. If you choose an FHA loan with less than 10% down, you pay MIP instead. The structure differs meaningfully.

FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which is rolled into your principal and financed over 30 years. On a $300,000 loan, that’s $5,250 added to what you owe. You also pay an annual MIP of 0.55–0.80% (depending on the loan size and down payment ratio) split into 12 monthly payments.

Conventional PMI has no upfront cost but starts with annual rates of 0.3% to 2.0%, again depending on your credit score and down-payment ratio. A borrower with a 720 FICO and 10% down might pay 0.8% annually; one with a 650 FICO and 5% down could pay 1.5% or higher.

The initial advantage goes to FHA: in year one, you’re financing less PMI cost. By year three or four, however, the picture shifts if your credit is decent. On a conventional loan with PMI around 0.8%, you’re paying roughly $2,400 annually on a $300,000 loan. On FHA, the annual MIP is $1,650–$2,100. But FHA never goes away.

The Cancellation Trap: Why Permanence Matters

This is where the two paths diverge most sharply. On a conventional loan, once your loan-to-value ratio hits 80%—meaning you’ve paid down to 80% of the home’s original value—PMI falls away. For a 30-year mortgage with a 10% down payment, this happens around year 9–10 (sometimes sooner if home values rise). After that milestone, you pay only principal and interest, no insurance.

FHA MIP is permanent if your down payment was less than 10%. Even if you’ve paid the loan down to 50% of the home’s value, the MIP stays. You cannot refinance it away without switching to a conventional loan—which requires either a large equity cushion, a much better credit score, or both.

Why does FHA do this? Because historically, FHA-insured loans defaulted at higher rates, and the government wanted to keep the insurance pool solvent. The tradeoff: FHA accepts borrowers banks would reject, but locks them into permanent insurance.

When Switching to Conventional Saves Money

The breakeven calculation comes down to three factors: your current equity, your credit score, and how much longer you plan to own the home.

Scenario 1: You bought with an FHA loan and 5% down seven years ago on a $250,000 house. You’ve paid the principal down to $200,000. Your credit has improved to 740. You’ve also built equity through home appreciation; the house is now worth $300,000, so your LTV is 67%. A conventional refinance is possible.

Current FHA MIP: ~$1,500/year. Refinance costs (appraisal, title, underwriting): $2,500–$4,000. New conventional loan rate: perhaps 6.5% vs. your current 6.0%. The refi makes sense only if you’ll stay 3+ more years and rates haven’t risen too far.

Scenario 2: You bought FHA with 3% down on a $350,000 house five years ago. You’re still underwater or barely positive on equity after a market downturn. Refinancing to conventional is not an option; you can’t put 20% down, and no bank will insure you to an 85% LTV without PMI anyway. You’re locked into FHA MIP for the life of the loan.

Scenario 3: You bought FHA with 8% down, now your home is worth 50% more due to market strength. You’ve paid the loan to 75% LTV. Refinancing to a conventional loan with no PMI is a slam-dunk saving thousands in annual insurance. Even paying refi costs, you break even in 18–24 months.

Credit Score and Down Payment: The Other Lever

Your credit score and down payment determine the exact rate you pay for insurance. On a conventional loan, a 740 FICO with 15% down might get 0.5% PMI; a 640 FICO with 10% down could be charged 1.4%. Over a 30-year life, that 0.9% annual difference is enormous.

FHA’s rates are lower and less sensitive to credit (580–620 borrowers all pay roughly the same MIP), which is why FHA is attractive for marginal borrowers. But that insurance never leaves, so the total cost over 30 years can exceed what a conventional PMI borrower pays after cancellation.

The Real Decision

Choose FHA if you have limited down-payment savings (5–8%), your credit score is below 650, or you plan to stay fewer than 7–8 years and don’t mind permanent insurance. Choose conventional if you can put 10% down, have a credit score above 700, and plan to stay 10+ years—the PMI will eventually cancel, and you’ll come out ahead.

For most borrowers in the 10–15% down range with decent credit, conventional beats FHA once you factor in the permanent MIP drag.

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