FHA vs Conventional Loan: How to Calculate Which Costs Less Over Time

The Wrong Way to Compare These Loans

Most borrowers look at two numbers: the interest rate and the monthly payment. Both metrics are incomplete. A 6.75% FHA rate on a $350,000 loan looks cheaper than a 7.10% conventional rate. It is not, once you account for the full mortgage insurance picture.

FHA charges two layers of mortgage insurance. The upfront mortgage insurance premium (UFMIP) equals 1.75% of the base loan amount. On a $350,000 purchase with 3.5% down, that is $5,948, typically rolled into the loan balance. The annual MIP adds another 0.85% of the loan balance per year, paid monthly. On that same loan, the annual MIP starts at $2,936, or $244.67 per month.

Conventional loans charge private mortgage insurance (PMI) only until you reach 20% equity. PMI rates range from 0.20% to 1.50% annually, depending on credit score and loan-to-value ratio. At 80% LTV, it disappears entirely.

That difference in duration is where the real cost gap opens.

How FHA Mortgage Insurance Actually Works

For loans originated after June 3, 2013, FHA requires MIP for the full 30-year term if your down payment is less than 10%. If you put down 10% or more, MIP drops after 11 years.

The current annual MIP rate structure for most 30-year FHA loans:

• Down payment below 10%, loan above $150,000: 0.85% annually
• Down payment 10% or more: 0.50% annually

There is no credit score discount on MIP. A borrower with a 620 score pays the same MIP as a borrower with a 780 score. That flat pricing structure is what makes FHA loans relatively expensive for higher-credit borrowers.

How Conventional PMI Works

Conventional PMI pricing responds directly to credit score and LTV. A borrower with a 760 score and 5% down might pay 0.30% annually. A borrower with a 640 score and 5% down might pay 1.25% annually.

Critically, PMI cancels automatically at 78% LTV based on the original amortization schedule. Borrowers can request cancellation at 80% LTV. On a 30-year fixed loan with a standard amortization curve, the 80% LTV threshold typically arrives between month 84 and month 120, depending on the original down payment and loan terms.

After that point, the conventional loan has zero mortgage insurance cost. The FHA loan continues charging 0.85% annually for the remaining 20-plus years.

Worked Example 1: 640 Credit Score, 3.5% Down, $350,000 Purchase

This is the scenario where FHA often wins. A 640 credit score attracts punishing conventional PMI rates.

FHA loan terms:

• Loan amount after UFMIP: $344,998 base + $6,037 UFMIP = $351,035
• Rate: 6.75%
• Monthly P&I: $2,277
• Monthly MIP: $247 (0.85% of $348,998 / 12)
• Total monthly payment: $2,524
• Total MIP paid over 30 years: $88,920 (declining slightly as balance amortizes)
• Total cost of funds over 30 years: approximately $561,000

Conventional loan terms at 640 score, 3.5% down:

• Loan amount: $337,750
• Rate: 7.50% (640 score adds significant rate premium)
• Monthly P&I: $2,363
• PMI at 1.40% annually: $394 per month
• Total monthly payment: $2,757
• PMI cancels at approximately month 102
• Total PMI paid: $40,188
• Total cost of funds over 30 years: approximately $577,000

Result: FHA saves approximately $16,000 over 30 years in this scenario. The lower rate overcomes the lifetime MIP.

Worked Example 2: 720 Credit Score, 5% Down, $400,000 Purchase

This is the scenario where conventional wins decisively. A 720 score unlocks PMI rates well below the FHA MIP floor.

FHA loan terms:

• Base loan: $380,000 plus UFMIP of $6,650 = $386,650
• Rate: 6.75%
• Monthly P&I: $2,509
• Monthly MIP: $274 (0.85% / 12 of $386,650)
• Total monthly payment: $2,783
• MIP paid over 30 years: $98,640
• Total cost of funds over 30 years: approximately $651,000

Conventional loan terms at 720 score, 5% down:

• Loan amount: $380,000
• Rate: 7.00% (720 score, 95% LTV)
• Monthly P&I: $2,529
• PMI at 0.55% annually: $174 per month
• Total monthly payment: $2,703
• PMI cancels at approximately month 90
• Total PMI paid: $15,660
• Total cost of funds over 30 years: approximately $594,000

Result: Conventional saves approximately $57,000 over 30 years. The PMI cancellation after 7.5 years is the decisive factor. The FHA MIP continues for 22 additional years after the conventional PMI ends.

The Breakeven Calculation You Need to Run

The analytical question is not which loan has a lower rate. It is: at what month does the conventional loan's cumulative cost fall below the FHA loan's cumulative cost, and does that month arrive within a realistic holding period?

The formula requires four inputs:

1. The monthly payment differential in the early years (often FHA is lower before PMI cancels)
2. The month when conventional PMI cancels
3. The cumulative cost advantage of conventional from PMI cancellation onward
4. Your expected holding period

If you sell or refinance before the conventional loan reaches breakeven, FHA may still win even for higher-credit borrowers. The average American refinances or sells within 7 to 10 years. For a 720-score borrower in Example 2, the breakeven arrives around month 48 to 60. Conventional wins well within a typical holding period.

Rate Differences Between FHA and Conventional

FHA rates tend to run 0.25% to 0.50% below comparable conventional rates. This gap exists because FHA loans carry a government guarantee, reducing lender risk. However, that rate advantage is entirely offset by MIP for most borrowers with credit scores above 680.

The crossover point, where the conventional rate disadvantage equals the MIP savings, sits near a 660 to 680 credit score for most loan sizes. Below that threshold, FHA frequently wins. Above it, conventional typically wins, especially for borrowers who will hold the loan through PMI cancellation.

When FHA Is the Correct Choice

FHA is the correct choice in three specific situations:

First, borrowers with scores below 660 face conventional PMI rates high enough that even lifetime MIP is cheaper in total. The math supports FHA clearly in this band.

Second, borrowers who cannot qualify for conventional underwriting at all. FHA allows debt-to-income ratios up to 57% in some cases. Conventional caps most approvals at 45% to 50%.

Third, borrowers who plan to sell within 36 to 48 months and whose credit score puts them in the 640 to 680 band. The lower FHA rate produces monthly savings that the short holding period never reverses.

When Conventional Is the Correct Choice

Conventional wins for borrowers with credit scores above 680 who will hold the loan past PMI cancellation. It also wins for anyone who can put 20% down and avoid mortgage insurance entirely.

For a 740-score borrower purchasing at $500,000 with 10% down, the lifetime MIP on an FHA loan would total approximately $115,000 over 30 years. A conventional loan at that score and LTV would carry PMI of roughly 0.35%, canceling after approximately 78 months, for a total PMI cost near $14,700. The difference is $100,300.

Run the Numbers for Your Specific Scenario

The examples above use representative rates and PMI pricing from current market conditions. Your actual figures will vary based on lender, credit score, loan amount, and state-level pricing differences. A 0.10% change in the PMI rate shifts the breakeven by six to twelve months. A 0.25% rate difference changes the total cost by $8,000 to $15,000 on a $400,000 loan.

Generic guidance cannot substitute for calculation with your actual numbers. The CalcMoney mortgage calculator accepts your credit score, down payment, purchase price, and expected holding period. It outputs total cost at every year mark for both loan types, identifies the breakeven month, and shows you exactly how much each option costs under your specific conditions.

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Use the calculator above. Enter your scenario. The right answer is a dollar figure, not a rule of thumb.