FHA vs Conventional Loan Cost: Which Is Cheaper?
FHA and conventional loans both allow low down payments, but their mortgage insurance structures are fundamentally different in one critical way: FHA mortgage insurance premium (MIP) is permanent for the life of the loan for most borrowers, while conventional private mortgage insurance (PMI) cancels when your loan reaches 80% of the original home value. This single difference makes conventional loans significantly cheaper over any ownership period longer than 7 to 10 years for most buyers.
This guide breaks down the full cost comparison with worked examples across 5 and 10 year ownership periods, explains when FHA is the better starting choice, and shows how refinancing from FHA to conventional can accelerate your savings. Use the BuyOrRent.ai calculator to model your purchase scenario and see the full cost comparison.
FHA: 1.75% UFMIP upfront + 0.55% to 0.85% annual MIP forever
On a $350,000 FHA loan, the 1.75% UFMIP is $6,125, financed into the loan. The 0.85% annual MIP adds $247.92 per month. Unlike conventional PMI, this MIP continues for the life of the loan for borrowers who put less than 10% down, regardless of how much equity you accumulate.
Conventional PMI: 0.2% to 1.5% annually, cancels at 80% LTV
Conventional PMI is determined by credit score and LTV. At 5% down and a 720+ credit score, PMI runs approximately 0.5% to 0.7% annually. At 80% LTV from scheduled payments alone, PMI cancels automatically. At 80% from current value via appreciation plus payments, you can request early cancellation. PMI typically adds 5 to 9 years to the loan before canceling.
FHA total MIP over 30 years: $89,000 on a $350,000 loan
At 0.85% annual MIP on a $350,000 FHA loan, the monthly charge is $247.92. Over 30 years, total MIP payments are $89,252. Conventional PMI at 0.6% for 9 years costs approximately $18,900 before cancellation. The long-term difference is $70,000 in favor of conventional for borrowers who stay in the home long term.
FHA rates are typically 0.125% to 0.375% lower than conventional
FHA loans carry slightly lower interest rates than conventional loans for equivalent borrowers, reflecting the government guarantee. This rate advantage of 0.125% to 0.375% partially offsets the higher MIP cost in the early years of the loan. On a $350,000 loan, a 0.25% rate difference saves $54 per month before accounting for MIP.
Which Loan Is Cheaper Long Term?
For most borrowers who plan to stay in the home longer than 7 years, a conventional loan is cheaper long term because PMI cancels while FHA MIP does not. The crossover point where conventional becomes cheaper typically arrives between year 5 and year 9 depending on credit score, LTV, and appreciation rate. Borrowers who plan to sell or refinance within 3 to 5 years may find FHA cheaper because the lower rate and flexible qualification outweigh the MIP cost over a short horizon.
Use the BuyOrRent.ai calculator to compare total cost over your planned ownership period. Also see the guide to removing PMI early if you choose conventional.
FHA vs Conventional: $350,000 Home, 3.5% FHA Down vs 5% Conventional Down
| Cost Item | FHA (3.5% down) | Conv. (5% down) |
|---|---|---|
| Down payment | $12,250 | $17,500 |
| UFMIP / upfront cost | $6,126 (financed) | $0 |
| Loan amount | $343,876 | $332,500 |
| Interest rate (est.) | 6.625% | 6.875% |
| Monthly P&I | $2,204 | $2,183 |
| Monthly MIP / PMI | $243 (permanent) | $166 (cancels ~yr 9) |
| Total monthly (MI included) | $2,447 | $2,349 |
| Cumulative MI cost at year 10 | $29,160 | $15,000 (cancels yr 9) |
| Cumulative MI cost at year 15 | $43,740 | $15,000 (no increase) |
| Cumulative MI cost at year 30 | $87,480 | $15,000 (no increase) |
FHA MIP rate: 0.85% annually (most common tier). Conventional PMI rate: 0.6% (720+ credit score). Rates are illustrative estimates. Actual rates vary by lender, credit profile, and market conditions.
In simple terms, FHA MIP is a fee you pay the government for guaranteeing your loan. Unlike conventional PMI, which is a private insurance contract that ends when your equity reaches a threshold, FHA MIP is built into your loan terms and does not cancel based on equity growth for most borrowers.
The specific rule: FHA loans with less than 10% down originated after June 3, 2013, carry MIP for the entire loan term. FHA loans with 10% or more down carry MIP for only 11 years. This 2013 policy change made long-term FHA ownership significantly more expensive than it was historically, and shifted the conventional loan advantage from moderate to substantial for most longer-term owners.
Which borrower profile applies to you?
Credit score below 680 or high DTI requiring FHA flexibility
FHA allows credit scores as low as 580 with 3.5% down and DTI ratios up to 57% in some cases. If conventional lenders are declining or pricing you at rates 0.5% or more above FHA due to credit score, FHA is likely your more affordable starting point. Plan to refinance to conventional after 3 to 5 years when your credit score and equity position improve.
Credit score 680 to 740 with limited down payment savings
This is the most competitive zone. FHA's lower rate can offset higher MIP in the short term. Run a year-by-year comparison for your specific credit score, down payment amount, and planned ownership duration. For stays of 5 years or less, FHA may win. For stays of 7-plus years, conventional with early PMI cancellation through appreciation is typically superior.
Credit score 740+ with 5% to 10% down payment available
At 740+ credit score, conventional PMI rates are 0.3% to 0.6% annually. FHA MIP is 0.85%. The conventional loan carries a lower starting MIP cost AND the PMI cancels within 7 to 9 years. FHA MIP would continue for the life of the loan. There is no financial scenario where FHA is the better long-term choice for a 740+ borrower with 5% or more down.
When FHA Is the Better Starting Choice
- Credit score is below 680 and conventional pricing is punitive: Conventional loans with credit scores between 620 and 679 carry loan-level price adjustments (LLPAs) that effectively increase the rate by 0.5% to 0.75%. At these scores, conventional PMI can be 0.9% to 1.4% annually. FHA at 0.85% MIP with no LLPAs may produce a lower total monthly cost despite the permanent MIP. Borrowers should obtain quotes for both loan types at current rates before deciding.
- Short planned ownership horizon of 3 to 5 years before sale or refinance: Over a 5-year period, the total MIP cost on an FHA loan is $14,580 on a $350,000 loan at 0.85%. The total conventional PMI cost is $9,960 at 0.6% before any early cancellation. The gap of $4,620 over 5 years is small and may be offset by the FHA rate advantage of $54 per month ($3,240 over 60 months). In short holds, FHA and conventional produce nearly identical total cost.
- Limited savings make the FHA 3.5% down requirement the only qualifying path: The most common reason borrowers choose FHA is not cost optimization but down payment availability. FHA requires 3.5% down ($12,250 on $350,000) versus the 5% minimum for conventional loans without second mortgage structures ($17,500 on $350,000). The $5,250 difference in required savings can mean the difference between being able to buy now and waiting 4 to 6 more months. For these borrowers, FHA cost is a secondary consideration to qualification accessibility.
When Conventional Is Clearly the Better Long-Term Choice
- Credit score is 680 or above and you plan to stay 7 or more years: At 680+ credit scores, conventional PMI rates are competitive with FHA MIP, and the PMI will cancel after 7 to 9 years. Over 30 years, this difference represents $50,000 to $70,000 in mortgage insurance savings. For borrowers with 680+ scores and no strong reason to prefer FHA, conventional is the financially superior long-term choice.
- Your market has strong appreciation that will accelerate equity to 80% LTV quickly: In a market where your home appreciates 4% to 5% annually, the loan may reach 80% of current value in 5 to 6 years rather than 9. Once you request PMI cancellation based on current appraised value, the monthly PMI savings start immediately. FHA MIP continues regardless of how much your home appreciates. Every year of appreciation increases the long-term advantage of choosing conventional.
- You plan to refinance when rates drop, creating a natural opportunity to eliminate MIP: Borrowers who chose FHA due to rate timing can refinance to conventional when rates fall, eliminating MIP if the new appraised value produces an LTV at or below 80%. This strategy is common: buy with FHA at low down payment, let appreciation build equity, refinance to conventional 3 to 5 years later with no PMI required on the new loan. The refinance transaction costs (typically 1.5% to 2.5% of loan) are typically recovered within 2 to 3 years from MIP elimination savings.
10-Year Total Cost Comparison: $350,000 Home
$350,000 home. FHA: 3.5% down, 6.625% rate. Conventional: 5% down, 6.875% rate. 720 credit score.
Conventional is $16,680 cheaper over 10 years despite the higher down payment required. This advantage grows to $52,000 by year 20 and $72,000 by year 30 as FHA MIP continues accumulating while conventional PMI stopped at year 9. The conventional loan requires $5,250 more at closing, but this additional upfront cost is recovered by year 3.5 from the monthly savings of $98 per month.
See the full hidden costs guide to add taxes, insurance, and maintenance to this comparison, and visit the break-even guide to see how loan choice affects rent vs buy analysis.
Key Factors That Change the FHA vs Conventional Decision
Credit score determines conventional PMI cost and rate premium
At 760+ credit score, conventional PMI is approximately 0.2% to 0.4% annually, far below FHA's 0.85% MIP. The comparison strongly favors conventional at high credit scores. At 620 to 660, conventional PMI can be 1.0% to 1.4%, and combined with a rate premium of 0.5%+, FHA may be cheaper initially. Your credit score is the single most important variable in the comparison.
Home appreciation rate determines how fast conventional PMI cancels
In markets with 4% to 5% annual appreciation, the loan may reach 80% of current appraised value in 5 to 6 years. This accelerates conventional PMI cancellation by 3 to 4 years versus the standard 9-year schedule from payments alone. Every year of early PMI cancellation from appreciation saves approximately $2,000 in PMI costs and widens the conventional advantage.
Planned ownership duration is the clearest predictor of the right choice
Under 5 years: FHA and conventional are financially close, with FHA often qualifying more borrowers. 5 to 7 years: Conventional typically wins if credit score is 680+. Over 7 years: Conventional is almost always cheaper due to PMI cancellation and the growing accumulation of FHA MIP savings. Duration is the most reliable guide when credit score falls in the 660 to 720 range.
Refinance plans affect whether FHA is a viable stepping stone
Many borrowers successfully use FHA as a stepping stone: buy with FHA to enter the market with lower down payment and flexible DTI, then refinance to conventional 3 to 5 years later when equity and credit score have improved. The refinance costs 1.5% to 2.5% of the loan amount, which is recovered in approximately 24 to 36 months from MIP elimination. This strategy requires planning for the refinance from the start.
Model FHA vs Conventional for Your Scenario
Enter your credit score, purchase price, down payment amount, and planned ownership period to see the full cost comparison and identify the cheaper loan for your situation.
Compare Loan CostsFrequently Asked Questions
What is the main cost difference between FHA and conventional loans?
FHA loans carry two types of mortgage insurance: an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, financed into the loan, and an annual MIP of 0.55% to 0.85% paid monthly. For most borrowers, the annual MIP is permanent for the life of the loan if they put less than 10% down. Conventional loans with PMI charge 0.2% to 1.5% annually based on credit score and LTV, but PMI cancels automatically when the loan reaches 78% of the original purchase price and can be requested at 80%. Over 10 to 15 years, conventional loans are almost always cheaper due to PMI cancellation, even if the starting monthly cost is similar.
Can I refinance out of FHA MIP into a conventional loan?
Yes, and this is one of the most common reasons to refinance. If your home has appreciated enough that your loan balance is at or below 80% of the current value, refinancing to a conventional loan eliminates MIP entirely with no further PMI required. For example, if you bought a $300,000 home with 3.5% FHA down and your home is now worth $380,000 after 3 to 4 years of appreciation, your loan balance may be around $276,000, which is 72.6% of $380,000. A conventional refinance at this LTV carries no PMI at all, eliminating $185 per month in MIP that would have continued for the life of the FHA loan.
Who qualifies for a conventional loan vs an FHA loan?
FHA loans require a minimum credit score of 580 for 3.5% down (or 500 with 10% down) and have debt-to-income ratio (DTI) flexibility up to 57% in some cases. Conventional loans require a minimum 620 to 640 credit score for most lenders and preferred DTI below 45%. FHA loans also require the property to meet minimum condition standards that conventional appraisals do not. Borrowers with credit scores between 620 and 680 often qualify for both loan types but should compare total cost over their planned ownership period, not just the initial rate.
Does FHA ever become the cheaper option long term?
FHA can be the cheaper option when the borrower plans to own the property for a very short period (1 to 3 years), when the FHA rate is significantly lower than the available conventional rate, or when the borrower's credit score is low enough that conventional PMI would be very expensive (above 1.0% annually). For borrowers in the 620 to 680 credit score range, conventional PMI can be 0.9% to 1.4% annually, which is higher than FHA's 0.85% MIP. In these cases, the comparison is closer and the borrower's timeline determines which is truly cheaper.
How do FHA loan limits affect borrowers in high-cost markets?
FHA loan limits vary by county and are set annually by HUD. In 2026, the standard FHA loan limit is $524,225 for single-family homes. High-cost areas (most of California, New York metro, Seattle, Denver, and other expensive markets) have limits up to $1,209,750. Borrowers who need loans above the FHA limit in their county must use a conventional loan, a jumbo loan, or a combination structure. This means FHA is not available for many purchases in expensive coastal markets regardless of credit or down payment preference.
What is a better choice for first-time buyers: FHA or conventional?
First-time buyers with credit scores above 700 and a 5% to 10% down payment typically benefit more from a conventional loan over any ownership period longer than 5 years, because PMI will cancel while FHA MIP will not. First-time buyers with credit scores between 580 and 680 or who need the more flexible DTI ratios that FHA allows may have no practical alternative to FHA for initial qualification. Many first-time buyers start with FHA and refinance to conventional after 3 to 5 years once equity and appreciation bring the LTV below 80% of the new value.
Methodology
FHA scenario: $350,000 purchase price, 3.5% down ($12,250), 1.75% UFMIP ($6,126 financed into $343,876 loan), 6.625% 30-year fixed rate, 0.85% annual MIP ($243/mo), life-of-loan MIP per HUD guidelines for loans with less than 10% down originated after June 3, 2013. Conventional scenario: $350,000 purchase price, 5% down ($17,500), $332,500 loan, 6.875% 30-year fixed rate, 0.6% annual PMI ($166/mo) based on 720+ credit score tier, PMI cancels at month 108 (year 9) via scheduled amortization to 78% of original purchase price. Rate differential of 0.25% reflects typical FHA rate advantage per Optimal Blue and Freddie Mac survey data. PMI and MIP rates are illustrative; actual rates vary by lender and credit profile. Conventional loan-level price adjustments (LLPAs) not modeled separately. Cumulative costs calculated using standard amortization. All figures are illustrative and not personalized recommendations.
Editorial Note: This content is provided for informational and educational purposes only and does not constitute financial, tax, legal, mortgage, or real-estate advice. Housing decisions depend on local market conditions, personal finances, and property-specific factors. Consult qualified professionals before making financial decisions.
Related Guides
How to Remove PMI Early
The fastest strategies to cancel PMI and save $150 to $300 per month.
10% Down Payment Guide
How 10% down compares to 5% and 20% on monthly payment and PMI timeline.
Break-Even Analysis Guide
How loan type choice affects rent vs buy break-even timing.
Hidden Costs of Homeownership
All the costs beyond the mortgage payment that buyers need to budget for.