FHA MIP vs Conventional PMI: Which Costs Less?

Mortgage insurance lets you buy a home with a low down payment. But not all mortgage insurance is the same. The FHA version (MIP) and the conventional version (PMI) work very differently.

FHA MIP — How it works

• Upfront MIP: 1.75% of the loan, rolled into your loan amount. On a $300k loan, that's $5,250 added to what you owe.
• Annual MIP: 0.55% of the loan balance per year, paid monthly. On $300k: about $137/month.
• Duration: If you put less than 10% down, MIP lasts the life of the loan. Refinance or sell to get rid of it.

Conventional PMI — How it works

• Upfront cost: Typically $0-0.5% depending on lender and credit. Some lenders roll it in.
• Annual cost: 0.3-1.5% depending on credit score and down payment. For a 700-score borrower with 5% down: about 0.5% or ~$125/month on $300k.
• Duration: PMI drops off automatically when your LTV hits 78%. You can also request cancellation at 80% LTV.

Breaking it down by scenario

Scenario A: 3.5% down, 640 credit, sell in 3 years.

• FHA: Upfront MIP costs $5,250 + $4,932 in annual MIP = ~$10,182 total.
• Conventional: Wouldn't qualify at this credit level with 3.5% down. FHA wins.

Scenario B: 5% down, 700 credit, sell in 7 years.

• FHA: Upfront MIP $5,250 + annual MIP $11,508 over 7 years = ~$16,758.
• Conventional: PMI drops off in year 5. Total PMI: ~$6,000. Conventional wins by $10k.

Scenario C: 10% down, 680 credit, sell in 5 years.

• FHA: MIP drops after 11 years (with 10%+ down). Total over 5 years: Upfront $5,250 + annual $8,220 = ~$13,470.
• Conventional: PMI at 10% down with 680 credit: drops off around year 3. Total: ~$3,600. Conventional wins big.

The key difference in one sentence

FHA MIP has a lower monthly cost for low-credit borrowers but lasts forever. Conventional PMI is cheaper for decent-credit borrowers and eventually goes away.

The takeaway: If your credit is under 640 and you need 3.5% down, FHA is your move. If your credit is 680+ and you can put 5-10% down, conventional almost always costs less in the long run.