Mortgage insurance is the fee you pay to protect the lender when you make a small down payment. It exists in two very different flavors — FHA MIP and conventional PMI — and confusing them costs first-time buyers thousands of dollars. This guide breaks down exactly how each one is calculated, when it can be removed, and how to model it.
What Is FHA MIP?
FHA loans carry a Mortgage Insurance Premium (MIP) with two components:
- Upfront MIP (UFMIP): 1.75% of the base loan amount, added on top of your loan balance at closing. On a $300,000 loan, that is $5,250 of additional debt you will pay interest on for 30 years.
- Annual MIP: charged as a percentage of the average annual outstanding loan balance, divided into 12 monthly payments. For most borrowers putting less than 10% down, the rate is approximately 0.55% per year.
FHA MIP Cancellation Rules
- Down payment under 10%: MIP lasts for the life of the loan. It never cancels automatically.
- Down payment of 10% or more: MIP ends after 11 years.
- The only early exit is refinancing (typically to a conventional loan once you have 20% equity).
What Is Conventional PMI?
Private Mortgage Insurance (PMI) applies to conventional loans with less than 20% down. Unlike FHA MIP, PMI is priced based on your credit score, loan-to-value ratio, and occupancy, which is why two borrowers with the same loan can pay very different PMI rates.
Typical annual PMI costs range from 0.3% to 1.0%+ of the loan amount. A borrower with a 760 credit score and 5% down might pay 0.35%, while a 640-score borrower with the same down payment might pay 0.95%.
PMI Cancellation Rules (The Big Advantage)
- Borrower-requested cancellation: once your balance is scheduled to reach 80% LTV (based on the original value), you can request PMI removal in writing — you do not have to wait for it to happen automatically.
- Automatic termination: PMI auto-cancels at 78% LTV on the original amortization schedule.
- Final termination: PMI must be dropped at the midpoint of the loan term regardless of balance.
- Accelerated removal: appreciation or improvements can justify a new appraisal supporting early removal with many lenders.
The Math: MIP vs. PMI on a $300,000 Loan
| Scenario | FHA (3.5% down) | Conventional (5% down, 700 FICO) |
|---|---|---|
| Loan amount | $289,500 + $5,066 UFMIP = $294,566 | $285,000 |
| Upfront cost (financed) | $5,066 | $0 |
| Annual insurance rate | 0.55% | ~0.55% |
| Monthly insurance | ~$135 | ~$131 |
| Insurance removable? | No (life of loan) | Yes, at 80% LTV |
| 10-year insurance cost | ~$16,200 | ~$8,900 (drops ~year 7) |
Even with similar monthly rates, the conventional borrower pays dramatically less over time because PMI actually ends. The FHA borrower also pays interest on the financed UFMIP for the full 30 years.
When FHA MIP Is Still the Right Choice
- Credit scores under 640: conventional PMI pricing becomes punitive, and many lenders decline conventional loans below 620. FHA's flat pricing is often cheaper.
- Higher DTI: FHA tolerates debt-to-income ratios conventional underwriting may reject.
- 3-4 unit purchases: FHA's multi-unit flexibility (with the self-sufficiency test) has no real conventional low-down-payment equivalent.
Strategy: The FHA-to-Conventional Refinance Play
Many first-time buyers use FHA as a stepping stone: buy with 3.5% down now, build equity through paydown and appreciation, then refinance into a conventional loan at 80% LTV to kill the MIP. This works best when home values are rising; if values fall, you can be stuck paying MIP indefinitely.
Model It Before You Decide
Our First-Time Homebuyer Mortgage Calculator applies the correct UFMIP, annual MIP, and PMI rules automatically, and shows the exact month conventional PMI drops off based on your amortization. Compare both loan types on the same property before you write an offer.