FHA vs Conventional Loans: Which Actually Costs Less?

Choosing between an FHA and a conventional loan is the single biggest early decision for most buyers, and the headline rate is not the whole story. The real difference shows up in the down payment, the mortgage insurance, and how long you pay it. This guide compares them on the factors that move your monthly payment and your total cost, with a worked example.

The two-minute summary

| Factor | FHA | Conventional | |--------|-----|-------------| | Minimum down | 3.5% (580+ score); 10% (500–579) | ~3%–5% typical; 20% avoids PMI | | Credit flexibility | More forgiving | Rewards higher scores | | Mortgage insurance | Upfront 1.75% + annual MIP (monthly) | PMI if <20% down | | When insurance ends | 11 yrs (10%+ down) or loan life (<10% down) | At 80% LTV (you request); auto at 78% | | Best for | Lower credit, thin down payment | Stronger credit, 10%+ down |

Down payment and credit

FHA was built for buyers with limited cash or credit history: 3.5% down at a 580 score, or 10% down as low as 500. Conventional loans start around 3%–5% down but price more aggressively as your credit and down payment rise. If you can put 20% down, conventional is the clear winner because no PMI is required at all.

Mortgage insurance: the deciding factor

This is where the two diverge most.

• FHA (MIP). You pay a one-time upfront mortgage insurance premium of 1.75% of the base loan amount (financed into the loan) plus an annual MIP billed monthly. The annual rate depends on your loan size and loan-to-value ratio; for typical loans at or under the standard limit it runs roughly 0.50%–0.55% per year. Unless you put 10% or more down (then it ends at 11 years), the monthly MIP generally continues for the life of the loan.
• Conventional (PMI). Required only when you borrow more than 80% of the home's value. Rates vary with credit and LTV, often ~0.2%–1.5% annually. You can request cancellation at 80% LTV, and the servicer must auto-cancel at 78% LTV under federal law.

Because FHA insurance usually lingers, a borrower who stays in the home for many years often pays far more in insurance on FHA than on conventional.

Worked comparison: $300,000 home, 5% down

Figures below are illustrative (they assume a 6.5% note rate and current-ish insurance rates; your quote will differ). Loan amount is about $285,000.

| | FHA (3.5% down) | Conventional (5% down) | |---|---|---| | Down payment | $10,500 | $15,000 | | Upfront MIP / no equivalent | $4,913 financed | — | | Monthly P&I (≈6.5%) | ~$1,800 | ~$1,800 | | Monthly mortgage insurance | ~$130 (MIP) | ~$120 (PMI) | | Insurance ends | at 11 yrs (10%+ down) or loan life | at 80% LTV (~year 7–9) |

At 5% down, FHA's financing of the upfront premium and ongoing MIP can make it cost more over time even when the monthly insurance looks similar. At 3.5% down, FHA is often the only practical path, so the comparison is moot — take FHA.

Which should you pick?

• Choose FHA if your score is below ~620, you have only 3.5% down, or a higher DTI. Approval is easier and the monthly cost is competitive at low down payments.
• Choose conventional if you have 10%–20% down, a 680+ score, or you plan to stay long enough that dropping PMI matters. You avoid the upfront FHA premium and the permanent monthly insurance.
• Plan to refinance out of FHA once you cross ~20% equity to stop the MIP — but model the refinance costs first with the refinance calculator.

Key Takeaways

FHA opens the door with a small down payment and flexible credit, but its mortgage insurance usually lasts longer and costs more over time. Conventional loans reward a bigger down payment and stronger credit by letting you cancel PMI. Run both scenarios in the mortgage calculator with your real down payment and credit before you commit.