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Every FHA loan carries mortgage insurance. It is not optional, it is not credit-score based, and it is the main reason an FHA payment can be higher than a conventional payment for a strong-credit borrower. Understanding the two premiums — and when each ends — is the difference between an FHA loan that saves you money and one that quietly costs you for thirty years.
The two premiums
Upfront MIP (UFMIP) is 1.75% of the base loan amount, charged once at closing. Almost every borrower finances it into the loan rather than paying cash, which is why your final loan amount is slightly larger than your base loan amount.
Annual MIP is an ongoing premium, quoted as an annual percentage of the average outstanding balance and collected in twelve monthly installments as part of your payment.
| Term | Loan-to-value | Annual MIP factor |
|---|---|---|
| More than 15 years | Above 95% | 0.55% |
| More than 15 years | 95% or less | 0.50% |
| 15 years or less | Above 90% | 0.40% |
| 15 years or less | 90% or less | 0.15% |
Higher-balance loans above the standard limit carry slightly higher factors. Current factors are published by HUD and reviewed on this site monthly against hud.gov.
A worked example
A $350,000 purchase with the minimum 3.5% down, 30-year term:
- Base loan amount: $337,750
- Upfront MIP at 1.75%: $5,910 (financed) → total loan $343,660
- Annual MIP at 0.55% of the average balance: roughly $1,857 per year, or about $155 per month in year one
- Over the first five years, mortgage insurance costs roughly $15,100 including the financed upfront premium
Run your own numbers on the MIP calculator and the full payment calculator.
How long you pay it
This is the rule that decides whether FHA is a short-term bridge or a long-term mortgage:
| Down payment | Term | Annual MIP duration |
|---|---|---|
| Less than 10% | 30 years | Life of the loan |
| 10% or more | 30 years | 11 years |
| Less than 10% | 15 years | 11 years |
| 10% or more | 15 years | 11 years |
Note what is *not* on that list: paying down to 80% loan-to-value. On a modern FHA loan with minimum down payment, reaching 20% equity does not cancel mortgage insurance. Only the 11-year clock or a refinance ends it.
The three ways out
- Reach the 11-year mark if you put 10% or more down. Nothing to do; the premium simply stops.
- Refinance into a conventional loan once you have roughly 20% equity and a credit profile that prices well. This is the standard exit and the reason many buyers treat FHA as a three-to-seven-year product. Compare on the FHA vs conventional page.
- Sell. Mortgage insurance ends with the loan.
An FHA Streamline Refinance lowers your rate but keeps you in FHA — it does not remove mortgage insurance, though it may reduce the annual factor if your original loan carried a higher one, and it can trigger a partial refund of your original upfront premium if you refinance within 36 months.
MIP versus conventional PMI
| FHA MIP | Conventional PMI | |
|---|---|---|
| Priced on credit score | No | Yes — heavily |
| Upfront premium | 1.75%, usually financed | None (single-premium optional) |
| Cancels at 80% LTV | No, on most loans | Yes, by request; automatic at 78% |
| Minimum down payment | 3.5% | 3% (first-time), 5% typical |
| Best for | Scores under about 680, or thin credit | Strong credit with equity in sight |
For a 620-score borrower, FHA is usually cheaper monthly despite permanent MIP, because conventional PMI at that score is expensive. For a 740-score borrower with 10% down, conventional almost always wins.
Why the premium exists
FHA does not lend money. It insures loans made by approved lenders, and the premiums fund the Mutual Mortgage Insurance Fund, whose financial status HUD reports to Congress each year. That insurance is exactly why a lender will accept a 580 credit score and a 3.5% down payment at all — the premium is the price of access, not a penalty.
What to do with this
If you are buying with less than 10% down and expect to stay more than seven years, plan the refinance exit from day one: keep credit clean, avoid new debt, and re-evaluate as soon as your equity approaches 20%. If you are putting 10% or more down, the 11-year termination may make staying put the cheaper answer. Either way, model it before you close rather than after.
Rates and terms are estimates for illustration only, are not an offer or commitment to lend, and vary by borrower, property, program, and lender approval.