FHA vs conventional: how MIP and PMI change the monthly payment

Short answer: FHA loans charge an upfront mortgage insurance premium of 1.75% of the base loan plus an annual premium (0.55% a year in the most common case), while conventional loans charge private mortgage insurance (PMI) priced by your credit score and down payment. With strong credit, conventional usually costs less; with weaker credit, FHA often wins.

Borrowers — and many websites — compare FHA and conventional loans on the interest rate alone. The real difference is usually mortgage insurance. Here is how each one is calculated, with a worked example.

How is FHA mortgage insurance (MIP) calculated?

FHA MIP has two parts, both set by HUD:

1. Upfront MIP (UFMIP): 1.75% of the base loan amount, charged on every FHA purchase and usually added to the loan.
2. Annual MIP: a yearly percentage of the balance, paid monthly. Since HUD’s Mortgagee Letter 2023-05 cut rates by 30 basis points (effective March 20, 2023), the most common case — a 30-year term, less than 5% down, loan at or below $726,200 — is 0.55%. The full range runs from about 0.15% to 0.75% depending on term, loan size and loan-to-value.

How long annual MIP lasts depends on the down payment: with 10% or more down it ends after 11 years; with less, it generally stays for the life of the loan.

How is conventional PMI calculated?

PMI is priced by private insurers, not the government. The two biggest factors are your credit score and your loan-to-value ratio. Typical annual rates range from around 0.3% for excellent credit and 15% down to well over 1% for lower scores with 3–5% down.

PMI has two advantages:

• No upfront premium in the standard monthly-paid form.
• It ends. You can ask to cancel at 80% LTV based on the original value, and it must end automatically at 78%.

A worked example: $350,000 home

To isolate mortgage insurance, both loans below use the same illustrative 6.75% 30-year fixed rate. Real quotes will differ, so treat this as a method, not a prediction.

FHA, 3.5% down

• Base loan: $350,000 × 96.5% = $337,750
• Upfront MIP: $337,750 × 1.75% = $5,910.63, financed
• Total loan: $343,660.63
• Principal & interest: $2,228.98 a month
• Annual MIP (first year): $337,750 × 0.55% ÷ 12 ≈ $154.80 a month
• P&I + MIP ≈ $2,383.78

Conventional, 5% down

• Loan: $350,000 × 95% = $332,500
• Principal & interest: $2,156.59
• PMI at 0.55% (strong credit): ≈ $152.40 → total $2,308.98
• PMI at 0.90% (weaker credit): ≈ $249.38 → total $2,405.96

Taxes and insurance are left out because they are the same in each case.

What the example shows: with strong credit, conventional is about $75 a month cheaper and its PMI disappears once the loan pays down to 78% of the original value. With weaker credit, PMI pricing pushes conventional above FHA — and FHA also allows a smaller down payment.

Which should a borrower choose?

• Choose conventional when credit is strong and the borrower can put down 5% or more. Lower long-run cost, and removable PMI.
• Choose FHA when credit is fair or thin, or the borrower needs the 3.5% minimum. Compare again later: once there is 20% equity, refinancing into conventional can remove MIP.
• Look at loan limits. FHA limits for one-unit homes in 2026 run from $541,288 in low-cost areas to $1,249,125 in high-cost areas.

Why this matters for your calculators

A generic mortgage calculator that shows only P&I makes FHA and conventional look almost identical. That hides the one number that should drive the conversation. CalcFunnel’s FHA calculator applies the upfront and annual MIP from our audited data pack (with HUD as the source), and the PMI calculator shows how conventional insurance changes with down payment — so the borrower sees a realistic figure before they call.

For more on the program pages where these calculators belong, see where to put a mortgage calculator.

Estimates only. Program rules change; confirm current figures with HUD and your lender.