Most comparisons of these two programmes lead with the down payment, because the down payment is the number people arrive with. It is the wrong lead. On a purchase held for any length of time, the mortgage insurance is the larger difference, and the rule that governs it is the one that almost every article on the subject gets wrong.
The rule that is usually stated backwards
Conventional PMI cancels. FHA annual MIP mostly does not.
Under the Homeowners Protection Act of 1998 (12 U.S.C. 4901), a borrower-paid PMI policy on a conventional loan must be terminated on request when the scheduled balance reaches 80% of the original value, and automatically at 78%. Those are statutory rights. They belong to conventional loans.
FHA is governed by a different rule entirely. HUD Mortgagee Letter 2013-04 sets the duration of the annual mortgage insurance premium on the loan-to-value at origination:
- Above 90% LTV at origination — annual MIP runs for the full mortgage term. On a 30-year loan, that is 360 payments.
- At or below 90% LTV at origination — annual MIP runs for 11 years.
Note what is not there. There is no 80% threshold, no 78% threshold, and no test against your current balance. The duration is fixed on the day the loan closes, by the LTV on that day, and nothing you do afterwards short of refinancing changes it. Paying the loan down faster does not shorten it. A new appraisal showing the house is worth more does not shorten it.
What that costs, on one house
Take a $310,000 purchase at a placeholder 6.5% over 30 years. That rate is a round starting number so the arithmetic is legible — this site publishes no rates, and you should change it to whatever you are actually quoted.
FHA, 3.5% down. The down payment is $10,850, so the base loan is $299,150 and the LTV at origination is 96.5%. The up-front premium is 1.75% of the base loan — $5,235.13 — which almost everyone finances, bringing the amount amortised to $304,385.13. Principal and interest come to $1,923.92 a month. The annual MIP rate at this loan size, term and LTV is 0.55% (HUD Mortgagee Letter 2023-05), which is $138.80 in the first month and falls slowly as the balance does.
Because the loan started above 90%, that premium is charged in every one of the 360 months. The total is $32,850, on top of the $5,235.13 paid up front.
Now the part worth sitting with. The scheduled balance on that loan reaches 80% of the original $310,000 in month 139 — eleven years and seven months in. A calculator that cancelled FHA MIP at 80%, as the conventional rule would, would stop counting there, at $17,814. The borrower actually goes on to pay another $15,036 after that point. That is the size of the error, on one ordinary purchase, and it runs in the direction that makes the loan look cheaper than it is.
Run it on the FHA MIP calculator, which prints the duration rule beside the number rather than below the fold.
The same house, conventional
Conventional, 5% down. The down payment is $15,500, the loan is $294,500, and the LTV is 95% — worse than 20%, so PMI applies. At a borrower-paid rate of 0.58% of the loan per year, that is $142.34 in the first month, slightly more than the FHA premium. Principal and interest are $1,861.44, slightly less, because there is no financed up-front premium riding on the balance.
The difference is when it stops. The scheduled balance reaches 80% of the original price in month 124, and the borrower can require cancellation. Total PMI paid: $17,650.
So the two loans cost roughly the same per month at the outset, and the conventional loan costs $15,200 less in insurance over the life of the loan, plus the $5,235 up-front premium the FHA borrower financed. On these inputs the FHA loan is the more expensive one by a comfortable margin — and it is more expensive in a way that never appears on the first month’s statement, which is the only figure most people compare.
The 10%-down FHA case is genuinely different
Put 10% down on the same house and the FHA loan lands at exactly 90% LTV, which is at the threshold, not above it. The annual MIP rate drops to 0.50% and — the part that matters — the duration falls to 11 years. Month one is $117.69 and the total is $14,428, ending at payment 132.
That is less than half of the $32,850 the 3.5%-down version pays, for $20,150 more cash at closing. If you are near 10% down on an FHA loan, the last few thousand dollars of down payment buy more than the equity they represent. This is the single largest cliff edge in the FHA pricing structure and it is invisible unless you go looking for it.
Where FHA is still the right answer
None of the above says FHA is a bad programme. It says the insurance is its real price. FHA is the better loan when:
- Your credit is thin or recently damaged. HUD Handbook 4000.1 permits 3.5% down at a 580 score and 10% down from 500, and individual lenders layer their own stricter overlays on top. Conventional underwriting is less forgiving in this range.
- Your down payment is a gift or comes from an assistance programme. FHA’s rules on the source of funds are broader.
- Your debt-to-income ratio is high. FHA’s ratios run wider than the conventional guideline, which for some borrowers is the whole difference between a yes and a no. Which ratio binds you is worth knowing before you shop — the affordability calculator names it.
- You intend to refinance out within a few years anyway, and you have run that as a break-even rather than assumed it.
What this comparison deliberately leaves out
Loan limits. FHA and conforming limits are re-struck every year by HUD and the FHFA, and they differ by county and by unit count. Any figure printed in an article is wrong within twelve months, so there is not one here. Look up the current limit for your county.
Rates. There is no rate comparison in this piece because a rate comparison requires a date, and a dated number on a website is a stale number. Get two actual quotes on the same day and compare those.
Which one closes faster. Neither the lender nor this article controls the appraiser’s diary or the title company’s queue, so no timeline is claimed.
How to actually decide
Run both loans, at the same rate, over the length of time you expect to hold the house, and compare three numbers rather than one:
- Cash at closing, including the FHA up-front premium if you are not financing it.
- The month-one payment, all in.
- Total mortgage insurance over your holding period — using each programme’s own duration rule.
The monthly payment calculator does the first two side by side and itemises the insurance line, and the amortisation schedule shows you where the balance sits in the year you expect to sell. If the third number is the one that decides it, that is not an accident of these inputs. It usually is.