What's the Difference Between FHA vs PMI?

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Main takeaways

• FHA insurance is mandatory on FHA loans, while PMI only applies to conventional loans when your down payment is under 20%.

• FHA mortgage insurance lasts longer—often for the life of the loan—whereas PMI can be canceled once you reach 20% equity.

• FHA loans charge both an upfront and annual premium, while PMI is typically a monthly cost added to your mortgage payment.

• PMI is usually cheaper for borrowers with strong credit, but FHA insurance can be more affordable if your credit score is lower or you’re making a small down payment.

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When you apply for a mortgage, it can be tempting to go with the lender who offers the lowest interest rate. But that’s not the only factor you should consider when borrowing such a large amount—especially if you plan to make a small down payment. 

In the vast majority of cases, when you put down less than 20% on your home purchase, you’ll have to pay something called mortgage insurance to the lender. How much your premiums cost, and how long they’ll last, is something you’ll want to consider before taking out your loan. 

How does mortgage insurance work?

If you’re planning to make a down payment of less than 20%, your options typically include an FHA mortgage or a “conventional” home loan.

FHA loans are specifically geared toward low- and moderate-income borrowers, requiring a down payment of just 3.5% of the home’s purchase price. These mortgages are made by private lenders but backed by the Federal Housing Administration, an agency within the Department of Housing and Urban Development. That means, should a borrower default on their loan, the FHA steps in and reimburses the lender. 

In order to provide that financial safety net, the FHA collects mortgage insurance from borrowers. It assesses a one-time premium when you take out the loan, as well as a monthly premium that’s tacked onto each mortgage payment. While all borrowers pay these two premiums, the amount of the monthly fee is smaller for those who put down a larger amount of the home’s value.

While conventional loans—those without the backing of the FHA or any other government agency—aren’t always thought of as an alternative for cash-strapped homebuyers, some versions offer down payments as low as 3%. 

Most conventional loans are sold on the secondary market to Fannie Mae or Freddie Mac, who create lending guidelines that mortgage originators have to follow. Among them: Borrowers putting down less than 20% on the home purchase have to take out private mortgage insurance, or PMI.

PMI serves the same basic function as FHA insurance, providing a backstop for lenders in case the borrower falls behind on their payments. But in this case, it’s a private insurer who collects premiums and pays claims, not a government agency. 

About FHA Insurance 

When you take out an FHA home loan, you pay both Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (MIP). 

The UFMIP is always equal to 175 basis points, or 1.75% of the Base Loan Amount. On a $400,000 loan, that means you’re paying $7,000 in upfront insurance alone. You have the choice to pay the full premium when you close on the loan or finance it so that you’re gradually paying it off with each monthly loan payment. 

Unlike your upfront premium, the annual MIP depends on your loan amount and loan-to-value (LTV) ratio. An LTV of 85%, for instance, indicates that the loan equals 85% of the home’s sale price.

Let's look at an example. Imagine you’re buying a home worth $400,000 and you’re only able to put down the minimum 3.5% in cash. That makes your LTV equal to 96.5%. On a 30-year mortgage, you’ll be paying 55 basis points (0.55%) of your outstanding loan balance in MIP. 

The longer the term of your loan, and the less than you put down in cash, the more your premiums will be.

FHA Annual Mortgage Insurance Premium (MIP)
Mortgage Term of More Than 15 Years
Base Loan Amount	LTV	MIP (bps)	Duration
Less than or equal to $726,200	≤ 90.00%	50	11 years
	> 90.00% but ≤ 95.00%	50	Mortgage term
	> 95.00%	55	Mortgage term
Greater than $726,200	≤ 90.00%	70	11 years
	> 90.00% but ≤ 95.00%	70	Mortgage term
	> 95.00%	75	Mortgage term
Mortgage Term of Less Than or Equal to 15 Years
Base Loan Amount	LTV	MIP (bps)	Duration
Less than or equal to $726,200	≤ 90.00%	15	11 years
	> 90.00%	40	Mortgage term
Greater than $726,2000	≤ 78.00%	15	11 years
	> 78.00% but ≤ 90.00%	40	11 years
	> 90.00%	65	Mortgage term

Source: U.S. Department of Housing and Urban Development

A crucial aspect of MIP is that they stay with you for the life of the loan, unless you have an LTV of less than 90%—that is, you make a down payment of at least 10%. If you put down at least that 10%, the insurance premium is still with you for a while, but it goes away in 11 years. 

About PMI

You only have to pay PMI on conventional loans if you put down less than 20% of the purchase price. That’s a major advantage over FHA loans, where every borrower has to pay this extra amount. 

Why cap it at 20%? Lenders are taking on a lot more risk when they make a loan for more than 80% of the home’s value. If the homeowner should fall behind on payments and the lender has to foreclosure, it’s harder to resell the property and get all of its money back—especially with all of the costs it incurs to repossess and market the home. 

Unlike FHA insurance, there’s no upfront premium with PMI; you’re only paying a monthly amount. And once you reach 20% equity in your home, you can cancel the insurance. Depending on how much you put down and what happens to home prices, that could happen in just a few years. 

The amount of your monthly PMI premium is usually in the 0.2% to 2% of your loan amount. But it will vary based on a variety of factors, including: 

• Your credit score. Higher credit scores lead to lower PMI premiums.

• Your LTV ratio. The more you put down on your home, the lower your PMI will be.

• Your debt-to-income ratio. The lower the amount of debt you carry in relation to the amount of income you earn, the less risk you pose to the lender, which drives down the PMI.

• The type of occupancy. Generally, you’ll pay less PMI for a primary residence than a secondary residence.

• The type of dwelling. Loans on single-family homes typically have the lowest rates, whereas you tend to pay more for multi-unit buildings.

Which type of loan is better for you?

Conventional home loans have a number of advantages over FHA products. Importantly, they don’t require mortgage insurance if you have 20% or more equity in your home. And there’s no upfront premium that you have to pay, unlike FHA loans.

For a lot of borrowers with a low down payment, that makes conventional loans the better option overall. However, there are certain situations where an FHA loan may be your best bet. Often, these government-backed mortgages have lower closing costs than other loans. So if you’re getting an interest rate that’s similar, or even lower, FHA can be a compelling choice. 

And because it’s easier to qualify for these loans than conventional mortgages, the former may be your only option. Unlike conventional loans, you may be eligible for the FHA program if: 

• You have a credit score lower than 620. FHA allows FICO scores as low as 580—or even 500, if you put 10% down.

• You experienced financial hardship in the past few years. With FHA, you have to wait just two years after filing a Chapter 7 bankruptcy to potentially qualify for a loan. The waiting period is four years for a conventional mortgage.

• You want to use a non-occupant co-borrower who’s related to you to qualify for the loan. 

	MIP (FHA loans)	PMI (Conventional loans)
Upfront premium	1.75% of the loan amount	None
Annual premium	0.15% to 0.75% of loan amount	Generally 0.2% to 2.0% of loan amount
Duration	11 years, if you put down at least 10%. Otherwise, lasts for the life of the loan.	Can be canceled when your equity reaches 20%

The upshot

Because PMI can be canceled when you reach the 20% equity mark, conventional loans are often a good choice for borrowers who qualify. While insurance is important, however, it shouldn’t be the only factor you should consider when deciding on a mortgage. Look over the Loan Estimate for every lender and compare the interest rate and other fees as well.