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FHA vs Conventional Loan
Seven years, your numbers: MIP for life against PMI that drops off.
X VS Y COMPARISON · MONEY · MORTGAGES
FHA vs Conventional Loan: Which Costs Less in 2026?
The headline rates lie: FHA usually quotes 0.25–0.5% below conventional, but FHA’s mortgage insurance (MIP) lasts the life of the loan while conventional PMI drops off once you reach 20% equity. The honest comparison is total cost over a realistic horizon — the median US homeowner sells after about 7 years. At the defaults — a $400,000 home, 5% down, 6.25% FHA vs 6.75% conventional, 30 years — FHA costs $2,542/mo against conventional’s $2,702/mo, and $219,542 vs $226,983 over 7 years: FHA wins by $7,441, because the lower rate outweighs the MIP. Change the down payment to 20% and the verdict flips. Type your numbers and see.
What the comparison shows
At the defaults — $400,000 price, 5% down ($20,000), 6.25% FHA vs 6.75% conventional, 30 years — the FHA loan is $380,000 plus $6,650 of upfront MIP (1.75%) financed in, for a starting balance of $386,650. FHA’s P&I is $2,381/mo plus $161/mo of MIP (0.50%/yr at exactly 95% LTV, on the declining balance) = $2,542/mo. Conventional borrows $380,000: P&I $2,465/mo plus $238/mo of PMI (0.75%/yr at 95% LTV) = $2,702/mo. Over 7 years FHA totals $219,542 ($199,976 P&I + $12,915 MIP + $6,650 upfront) vs conventional’s $226,983 ($207,033 P&I + $19,950 PMI) — FHA wins by $7,441. Conventional’s PMI doesn’t drop until month 127 (about 10½ years) — past the 7-year window — so PMI runs all 84 months here.
| Output | Formula | What it means |
|---|---|---|
| FHA monthly payment | P&I on (loan + 1.75% UFMIP) at FHA rate + 0.50% ÷ 12 × balance | $2,542/mo at the defaults ($2,381 P&I + $161 MIP). The $6,650 upfront MIP is financed, so you pay interest on it too. |
| Conventional monthly payment | P&I on loan at conv rate + PMI band ÷ 12 × original loan | $2,702/mo at the defaults ($2,465 P&I + $238 PMI). The PMI band is 0.75%/yr at 5% down — typical for good credit. |
| FHA 7-year total | 84 × P&I + Σ monthly MIP + 1.75% upfront MIP | $219,542 at the defaults. MIP runs the life of the loan because the down payment is under 10%. |
| Conventional 7-year total | 84 × P&I + Σ monthly PMI until 80% LTV | $226,983 at the defaults. PMI is charged flat on the original loan until amortization crosses 80% of the home’s value. |
| Winner + gap | conventional 7-yr total − FHA 7-yr total | Positive means FHA wins. Here: FHA by $7,441 — the half-point rate edge beats the insurance cost. |
| PMI drop-off month | first month balance ≤ 80% of original price | Month 127 at the defaults — PMI survives the entire 7-year horizon. Raise the down payment and watch this fall. |
The honest wrinkle: the winner depends on the down payment more than the rates. Drop to 3.5% down and FHA wins by $13,001 over 7 years — conventional’s PMI at 96.5% LTV is brutal. Rise to 20% down and conventional wins by $10,534: no PMI at all, while FHA still charges 0.50% MIP for 11 years. The rate spread is a sideshow; the insurance structure is the main event. The full story — limits, bands, and the three deciding questions — is in the companion guide, and this calculator sits with the rest of the series on the X vs Y comparisons hub.
Who uses this
- The first-time buyer with 5% down: approved for both, torn between FHA’s lower rate and conventional’s droppable PMI — they type both quotes and let the 7-year gap decide.
- The 620-credit shopper: heard FHA is “for bad credit” but wonders if conventional with PMI is actually cheaper — they raise the PMI band mentally and see which side survives.
- The 10%-down strategist: sitting on $40,000 on a $400,000 home, asking whether FHA’s 11-year MIP beats conventional’s PMI — they test both down payments and compare.
- The future refinancer: planning to refinance out of FHA once they hit 20% equity — they read the 7-year totals as “cost until I refinance” and price the exit.
Accuracy & limitations
This is a P&I + mortgage-insurance comparison — it does not include property taxes, homeowners insurance, HOA dues, or closing costs, which are identical on both sides anyway. FHA math: 1.75% upfront MIP financed (per HUD Mortgagee Letter 2023-05); annual MIP grid for term >15yr — 0.55%/yr when the down payment is under 5% (LTV >95%), 0.50%/yr at 5–10% down, 0.50%/yr for 11 years at 10%+ down — computed monthly on the declining balance (HUD’s exact method uses an average balance; the difference is small). Base loans above the 2026 conforming limit of $832,750 use the higher 0.70/0.75% grid. MIP runs the life of the loan when the down payment is under 10% — it cannot be cancelled by request, only by refinancing. PMI bands (annual, flat on the original loan): ~1.00% below 5% down, ~0.75% at 5–10%, ~0.55% at 10–15%, ~0.35% at 15–20%, zero at 20%+ — typical mid-range for good credit (740+); weaker credit pays more, sometimes far more. PMI cancellation is modeled on amortization alone against the original price — no appreciation, no extra payments, no new appraisal. The 7-year horizon is the median ownership tenure, not your plan: if you’ll sell in 3 years or stay for 20, the gap moves. Rates shown as defaults (6.25% / 6.75%) reflect the October 2026 spread of roughly half a point; your quotes decide your answer.
Cite this calculatorBright Side Kit. “FHA vs Conventional Loan.” brightoolbox.com, 2026.
Bright Side Kit. "FHA vs Conventional Loan." https://brightoolbox.com/fha-vs-conventional-loan/ Accessed October 22, 2026.Frequently asked questions
Is FHA or conventional cheaper?
It depends on the down payment — that matters more than the rate spread. At our defaults ($400,000 home, 5% down, 6.25% FHA vs 6.75% conventional, 30 years), FHA is $7,441 cheaper over 7 years ($219,542 vs $226,983) because the half-point rate edge beats the MIP cost. But at 3.5% down FHA wins by $13,001, while at 20% down conventional wins by $10,534 — no PMI, while FHA still charges 0.50% MIP for 11 years. Type your quotes in the calculator.
How long does FHA mortgage insurance (MIP) last?
Usually the life of the loan. If your down payment is under 10%, the annual MIP never drops — you can only escape it by refinancing into a conventional loan. If you put down 10% or more, the annual MIP drops off after 11 years. The upfront MIP (1.75%, usually financed) is never refunded. This is the structural difference the calculator prices: conventional PMI can be cancelled, FHA MIP cannot.
When does PMI drop off a conventional loan?
You can request cancellation at 80% of the home’s original value, and the servicer must terminate it automatically at 78% — provided you’re current on payments — or at the loan’s midpoint, whichever is sooner. Appreciation alone doesn’t trigger it (the math uses original value), though you can ask the servicer to consider a new appraisal. In the calculator, PMI drops when amortization alone crosses 80% — at the defaults that’s month 127, past the 7-year window.
Can I put 3% down on a conventional loan?
Yes — through Conventional 97, HomeReady, or Home Possible (first-time buyers, 620+ credit, primary residence), with 5% the standard minimum otherwise. The catch: at 3% down your PMI band is around 1.0%/yr — roughly $320/mo on a $388,000 loan — which is why FHA often beats conventional at the very lowest down payments. The calculator uses 0.75%/yr at 5% down; weak credit pays more than the band shown.
Why are FHA rates lower than conventional rates?
Because the loan is government-insured: the lender takes less risk, so it charges less interest. In October 2026 the national averages ran about 6.79% FHA vs 7.31% conventional — roughly a half-point spread. But the lower rate is not a discount: FHA’s MIP (upfront 1.75% + 0.55%/yr for life when you put down under 5%) usually erases the rate edge. Compare total cost, not the note rate — that’s what the calculator does.
Should I refinance out of FHA to get rid of MIP?
Often, yes — it’s the only way to kill FHA MIP before the 11-year mark (at 10%+ down). The classic play: buy with FHA at 3.5% down, then refinance into a conventional loan once you’re at 80% loan-to-value and PMI drops too. The math to check: refinance closing costs vs the MIP you’d otherwise pay for years. Read the 7-year totals on the calculator as “cost until I refinance” and see if the exit pays for itself.