PMI and FHA mortgage insurance both protect the lender, not the homeowner. The key difference is the loan they insure: private mortgage insurance (PMI) is attached to a conventional mortgage, while FHA mortgage insurance is required on every FHA-insured loan. Conventional PMI can usually end as your balance falls and may be less expensive for borrowers with strong credit. FHA financing permits a down payment as low as 3.5% and can be more affordable for some buyers with lower credit scores or less cash, but it includes an upfront premium plus an ongoing premium.
There is no universal winner. Compare official Loan Estimates for the same purchase price, loan amount, term and property. Look at cash to close, monthly payment, any financed insurance premium, cancellation rules, loan limits and your expected time in the loan.
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What mortgage insurance does
Mortgage insurance reduces the lender’s loss if a borrower stops making payments. The Consumer Financial Protection Bureau describes it as a way to qualify for a loan that might otherwise be unavailable because the lender’s risk is lower. It does not insure your equity, belongings or payments, and it does not erase your responsibility for the mortgage after a foreclosure.
With a conventional loan, the insurance is usually called private mortgage insurance, or PMI, and premiums are paid to a private insurer through the lender. With an FHA loan, borrowers pay mortgage insurance premiums to support the Federal Housing Administration’s insurance program. Either arrangement raises the cost of borrowing but can make a low-down-payment purchase possible.
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PMI and FHA mortgage insurance compared
| Feature | Conventional loan with PMI | FHA loan with mortgage insurance |
|---|---|---|
| When it is generally required | Typically when the down payment is below 20% (the exact requirement depends on the loan’s loan-to-value rules and lender) | Required on every FHA loan |
| Who receives the premium | A private mortgage insurer | The FHA insurance program |
| Pricing drivers | Down payment, loan-to-value ratio, credit score, loan type, insurer and lender pricing | FHA premium schedule, loan terms and applicable FHA policy |
| Upfront charge | May be collected through closing or other lender pricing; the structure varies by loan | An upfront premium is charged at closing and may be financed into the loan |
| Ongoing charge | Usually included in the monthly payment while PMI applies | An ongoing premium is included in the monthly payment |
| Down payment cited in consumer guidance | PMI is commonly associated with financing above 80% loan-to-value | As low as 3.5% for eligible borrowers |
| Cancellation framework | Federal rules commonly allow borrower-requested cancellation at 80% of original value and automatic termination at 78% when the borrower is current, subject to the rules | Different FHA duration rules apply; do not assume the 78% or 80% conventional milestones apply |
The 20% figure is a common conventional benchmark, not a promise that every conventional loan will require or remove PMI at exactly that point. Your lender’s disclosures and the applicable federal and investor rules control.
How the costs are built
Conventional PMI pricing
PMI is not one national percentage. Insurers and lenders price it using the borrower’s credit profile, down payment, loan-to-value ratio, occupancy and loan characteristics. A higher loan-to-value ratio generally increases borrowing costs. Two buyers borrowing the same amount can receive different PMI quotes because their credit scores or down payments differ.
The Consumer Financial Protection Bureau says PMI rates vary by down payment and credit score and are generally cheaper than FHA rates for borrowers with good credit. That is a broad tendency, not a quote for an individual borrower. Request the actual PMI premium in a Loan Estimate rather than applying a rule-of-thumb percentage.
FHA upfront and monthly premiums
FHA insurance has two components. The upfront mortgage insurance premium is due at closing. A borrower may pay it in cash or finance it by adding it to the mortgage balance, if the loan permits that treatment. Financing the premium reduces the cash needed at closing but increases the amount borrowed, the interest charged over time and the total repayment cost.
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The second component is an ongoing premium collected with the monthly payment. Its amount and duration depend on the FHA case, loan terms and current FHA policy. FHA premium schedules and loan limits can change, so use the figures on the current Loan Estimate and FHA disclosures for your case.
A simple cost illustration
Suppose two buyers purchase the same home. Buyer A chooses a conventional loan with a smaller down payment and receives a PMI quote based on strong credit. Buyer B chooses an FHA loan with the same down payment. Buyer B’s cash-to-close worksheet includes an upfront FHA premium; if it is financed, the starting principal is higher. Buyer A may have a lower monthly insurance charge or may reach the point where PMI can end sooner, but the answer depends on the quoted premiums, interest rates and balance schedules.
This illustration is deliberately not a rate quote. Only the lender’s Loan Estimates show the actual dollars for the property, borrower and date.
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Down payment, loan-to-value and credit eligibility
FHA’s 3.5% option
Consumer guidance from the CFPB cites a minimum FHA down payment as low as 3.5% for eligible borrowers. FHA loans may accept lower credit scores than most conventional loans, although lenders can impose stricter requirements of their own. A 3.5% minimum does not mean every applicant qualifies with that amount: income, debt, employment, property condition, funds and the lender’s underwriting standards still apply.
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Conventional financing and the 20% threshold
For a conventional mortgage, the lender uses loan-to-value (LTV) to determine whether PMI is required and how the loan is priced. LTV compares the loan amount with the property value used for underwriting. A larger down payment lowers LTV and may reduce PMI pricing. At 20% down, many conventional borrowers avoid PMI at closing; a borrower who starts below 20% may be able to request cancellation later under federal rules.
Credit quality matters alongside LTV. A borrower with strong credit and a larger down payment may obtain a conventional PMI quote that is cheaper than FHA insurance. Someone with weaker credit or very little cash may find the FHA payment more competitive. CFPB guidance emphasizes that market conditions create no hard-and-fast rule.
Credit-score comparisons require actual underwriting
Do not choose solely from an advertised minimum score. The lender may price the conventional option differently at each score tier, while an FHA lender may apply a credit, debt-to-income or reserve requirement beyond FHA’s baseline. Ask for both options using the same credit report and application data so the comparison reflects your actual file.
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When conventional PMI can end
Borrower-requested cancellation at 80%
For many conventional mortgages covered by federal PMI rules, you can request cancellation when the scheduled principal balance reaches 80% of the home’s original value. The request generally must be written. You must be current, have a satisfactory payment history, have no junior liens and provide evidence that the property value has not declined when the servicer requires it. “Original value” is a defined term in the rules and is not automatically today’s appraised value.
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Automatic termination at 78%
PMI generally must terminate automatically when the scheduled balance reaches 78% of the original value if the borrower is current. The servicer uses the original amortization schedule, so extra principal payments may not move the automatic date in the same way they move the actual balance. Review the servicer’s disclosures for the projected termination date.
The midpoint rule
Federal rules also address termination after the midpoint of the original amortization schedule when the borrower is current and other conditions are met. This can matter for a long loan in which the balance has not reached 78% because of an interest-only period, a balloon structure or other payment design. Your servicer can confirm whether the rule applies to your loan.
Why FHA insurance follows different rules
FHA mortgage insurance does not automatically cancel at the conventional 80% request or 78% termination milestones. The required duration depends on the FHA case, the original loan-to-value ratio, the loan terms and the policy in effect when the case was assigned. Some borrowers may carry the ongoing premium for the life of the loan unless they refinance or otherwise pay off the FHA mortgage; other cases have different durations.
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Which option is cheaper for different borrowers?
| Borrower situation | Potential advantage | What must be verified |
|---|---|---|
| Strong credit and at least some cash for a conventional down payment | Conventional PMI may be cheaper than FHA insurance | PMI quote, interest rate, cash to close and the projected cancellation date |
| Lower credit score but otherwise eligible for financing | FHA may offer a lower overall insurance cost or easier approval | FHA premium, lender credit requirements, debt-to-income calculation and loan limits |
| Very small down payment | FHA’s 3.5% minimum may make purchase possible | Upfront premium, whether it is financed, monthly payment and reserves after closing |
| Plan to keep the loan only a few years | The option with lower initial cash and payment may be preferable | Sale or refinance costs, remaining insurance balance and any upfront premium paid or financed |
| Plan to keep the loan for many years | An option with a lower long-run insurance duration may cost less | Total interest, total insurance, cancellation rules and the amortization schedule |
These are decision patterns, not guarantees. CFPB guidance specifically says borrowers with good credit often see cheaper PMI, while borrowers with lower credit scores or smaller down payments can often find FHA the cheapest option. Your quotes determine the result.
How to compare Loan Estimates step by step
- Request two scenarios. Ask the same lender, or comparable lenders, for a conventional loan with PMI and an FHA loan for the same property price, down payment, loan term and occupancy. If you are still shopping, use the same assumed purchase price and loan amount.
- Check the loan type and amount. Confirm that the conventional estimate includes PMI and that the FHA estimate includes both the upfront and ongoing mortgage insurance premiums. Verify whether the FHA upfront premium is financed.
- Compare cash to close. Include down payment, lender and settlement charges, prepaid items, credits and any upfront insurance paid in cash. A lower down payment can be offset by a financed premium or higher recurring costs.
- Compare the full monthly payment. Review principal and interest, property taxes, homeowners insurance, mortgage insurance and any association dues. Do not compare insurance in isolation from the interest rate and other payment components.
- Read the mortgage-insurance line. Identify the monthly PMI amount or FHA ongoing premium, when it begins, and whether the estimate assumes a rate or premium that can change.
- Model the expected holding period. Add the insurance and interest paid during the years you expect to keep the loan. Then account for the balance remaining if you sell or refinance. A loan that is cheaper over 30 years may not be cheaper over four years.
- Record cancellation or duration terms. For conventional PMI, note the projected 80% request date, 78% automatic termination date and any conditions. For FHA, ask the lender to identify the applicable duration rule for the FHA case.
- Check loan limits and property eligibility. FHA loan limits vary by location and can change. Confirm that the property type, price and requested loan amount fit the current limit. Conventional programs also have their own eligibility and loan-limit rules.
- Ask for a written explanation of differences. Have the loan officer explain any rate, points, credits, insurance premium, adjustment or condition that makes one estimate appear cheaper.
Calculate the cost over the time you expect to own the home
Short holding period
If you expect to move or refinance soon, focus on cash to close and the first several years of payments. Financing an FHA upfront premium means you begin with a larger principal balance. Paying that premium in cash uses more savings. Compare both versions with the conventional option and include likely selling, refinancing and closing costs.
Long holding period
For a long stay, insurance duration and interest accumulation can outweigh a small difference in the starting payment. A conventional loan may eventually shed PMI under the applicable rules. An FHA loan may continue charging its ongoing premium according to its case-specific terms. Add every month of projected insurance, the interest on any financed upfront premium and the principal balance remaining at the end of your analysis period.
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Subtract the lower monthly cost of one option from the other, then divide the higher upfront cost by that monthly difference to estimate a break-even period. This is only a screening tool. Recalculate if rates, taxes, insurance, premiums, property value or the expected sale date changes. Do not treat a break-even result as a guarantee that you will qualify for a refinance or that the home will appreciate.
Common mistakes and how to avoid them
- Assuming FHA is always cheaper. FHA can help borrowers with lower scores or smaller down payments, but CFPB says PMI is generally cheaper for borrowers with good credit. Obtain both estimates.
- Assuming conventional means no insurance. A conventional loan with less than 20% down commonly requires PMI. Confirm the LTV and the quoted premium.
- Comparing only the down payment. Include the FHA upfront premium, financed balance, monthly insurance, interest and cash reserves after closing.
- Using a generic PMI percentage. PMI depends on credit, LTV, loan type, insurer and lender pricing. Use the premium on your Loan Estimate.
- Expecting FHA insurance to end at 78% or 80%. Those are conventional PMI milestones. Ask for the FHA case-specific duration.
- Ignoring lender overlays. A lender can require stronger credit or additional reserves than a program’s baseline. Compare the approval conditions as well as the price.
- Overlooking loan limits. FHA limits vary by location and are time-sensitive. Confirm the current limit before relying on a down-payment calculation.
- Forgetting that extra payments do not rewrite every rule. Additional principal may reduce the balance and interest, but automatic PMI termination is tied to the scheduled amortization framework. Ask the servicer how extra payments affect eligibility for borrower-requested cancellation.
Questions to ask before choosing
- What is the exact PMI premium for my credit score, LTV, loan type and property?
- What are the FHA upfront and ongoing premiums for my FHA case, and is the upfront amount financed?
- What will my total cash to close and full monthly payment be under each option?
- When can I request conventional PMI cancellation, and when is automatic termination projected?
- How long will the FHA ongoing premium apply under my specific loan terms?
- What credit, debt-to-income, reserve and property requirements differ between the two loans?
- What current FHA loan limit applies to this property and county?
- How much principal and total interest will remain if I sell or refinance after the number of years I expect to stay?
Bottom line
Choose conventional financing with PMI when its quoted rate, insurance premium and cancellation path produce the lower total cost for your credit and down payment. Choose FHA when its 3.5% minimum down payment, underwriting flexibility or quoted payment makes homeownership workable and the longer insurance cost fits your plans. The reliable answer comes from side-by-side Loan Estimates—not from a universal PMI percentage, a blanket FHA-versus-conventional slogan or the down payment alone.
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