An FHA loan can put you in a home with 3.5% down, but the mortgage insurance adds roughly $176.92 a month — and above 90% loan-to-value it is charged for the entire term.
How FHA mortgage insurance works
FHA loans are insured by the Federal Housing Administration, which lets lenders approve borrowers with lower credit scores and smaller down payments. The cost is mortgage insurance, and it comes in two parts that are easy to confuse.
Upfront MIP is 1.75% of the loan amount, charged when you close. It is usually paid in cash or credited toward the loan. Annual MIP is a percentage of the loan balance per year, divided into monthly payments and added to what you owe each month. On a 30-year loan at or below 95% LTV it is 0.5%; above 95% it rises to 0.55%.
Two other factors move the annual rate. A 15-year loan is priced far lower — 0.15% at or below 90% LTV and 0.4% above it. A loan above the high-balance threshold of $1,249,125 is priced higher again. What does not change the rate is falling below 90% LTV on a 30-year loan: the rate stays 0.5% either way. What it changes is the duration.
The cash you actually need
Buyers often underestimate the cash requirement. Beyond the down payment and upfront MIP, expect closing costs of roughly 2% to 5% of the purchase price, plus prepaid escrow for taxes and insurance. If the upfront MIP is financed rather than paid in cash, your cash requirement drops but your balance rises by the same amount plus interest.
When the annual premium never goes away
This is the part of FHA that surprises borrowers most. On a conventional loan, private mortgage insurance cancels automatically once you reach 78% loan-to-value. On an FHA loan the rule is different: the annual premium stops after 11 years only if the loan was at or below 90% LTV when it was made. Above 90% — which includes every borrower at the 3.5% minimum — it is charged for the entire term. Falling below 90% later does not shorten it; the duration is fixed at origination.
The practical consequence on the default example: a 3.5% down payment gives an LTV of 97.4%, so the annual premium runs the full 30 years. The calculator reports both the rate and the duration, because the second is what makes FHA expensive over time.
The usual exit is a refinance into a conventional loan once you have 20% equity. Whether that is worth it depends on the rate you can get at that point versus the premium you would stop paying — which is why the break-even date matters more than the monthly saving.
Frequently asked questions
Can I get rid of FHA mortgage insurance?
Only by refinancing, for most borrowers. If your loan was above 90% LTV when it was made, the annual premium is charged for the life of the loan and does not fall off at 78% the way conventional PMI does. Refinancing into a conventional loan removes it once you have 20% equity.
Is FHA really cheaper than a conventional loan?
Often on the rate, rarely on the total cost. For borrowers with under 20% down, the FHA note rate is usually lower than a conventional loan at the same equity level. But the annual premium that never ends can outweigh that difference, which is why the duration matters as much as the rate.
What credit score do I need for FHA?
Many FHA lenders work with a 580 minimum, and some go down to 500 with a larger down payment. At 580 or above, the minimum down payment is 3.5%.