PMI vs MIP: Which Mortgage Insurance Costs Less? (2026 Guide)

Why does mortgage insurance exist?

Mortgage insurance protects the lender if you default on your loan. It does not protect you. This is an important distinction because many first-time buyers assume they are paying for their own protection when they are actually paying to reduce the lender's risk of lending to someone with less than 20% equity.

The reason lenders require it below 20% equity is straightforward: if you put down $14,000 on a $400,000 home and stop paying, the lender needs to foreclose, sell the property, and recover their money. If the property value has dropped even slightly, the lender loses money. Mortgage insurance covers that potential loss.

Understanding the difference between PMI (conventional loans) and MIP (FHA loans) helps you choose the right loan product and plan for when (and if) you can eliminate the cost. For a broader comparison of loan types, see our FHA vs Conventional vs USDA guide.

How does PMI work on conventional loans?

PMI applies to conventional loans when your down payment is less than 20%. Private insurance companies provide the coverage, and rates vary based on your credit score, down payment percentage, and loan amount.

Rate ranges: A buyer with a 760 credit score putting 5% down might pay 0.3% to 0.5% of the loan amount annually. A buyer with a 660 score putting 3% down might pay 0.8% to 1.5%. On a $350,000 loan, that ranges from $87/month (best case) to $437/month (worst case).

Cancellation rules: PMI on conventional loans automatically terminates when the loan balance reaches 78% of the original purchase price through normal payments. You can request cancellation at 80% equity. Some lenders allow early cancellation based on current appraised value if the home has appreciated significantly.

Payment options: PMI can be paid monthly (most common), as a single upfront premium, or through a lender-paid arrangement where the lender pays the premium in exchange for a higher interest rate.

How does MIP work on FHA loans?

MIP has two components:

Upfront MIP (UFMIP): 1.75% of the loan amount, charged at closing. This is almost always financed into the loan rather than paid in cash. On a $386,000 loan, UFMIP is $6,755 added to your loan balance.

Annual MIP: 0.55% of the average outstanding loan balance per year (for most FHA borrowers with terms over 15 years and LTV over 95%). This is paid monthly as part of your mortgage payment. On a $386,000 loan, annual MIP is approximately $2,123/year or $177/month.

Duration: If your down payment is less than 10% (which applies to most first-time FHA buyers putting 3.5% down), MIP lasts for the entire life of the loan. The only way to eliminate it is to refinance into a conventional loan once you have 20% equity.

When does PMI make more sense than MIP?

High credit score buyers. If your credit score is 720 or above, PMI rates will likely be lower than FHA's 0.55% annual MIP. Plus, PMI cancels automatically while FHA MIP does not. The long-term savings of PMI cancellation can be significant.

Buyers planning to build equity quickly. If you plan to make extra principal payments or expect your home to appreciate substantially, conventional with PMI gives you a clear path to eliminate mortgage insurance. FHA does not.

Larger down payment buyers. If you can put 10% or more down, conventional PMI rates drop substantially and cancellation happens sooner. At 15% down, PMI is minimal and cancels within a few years of normal payments.

When does FHA MIP make more sense?

Lower credit score buyers. FHA's MIP rate is the same regardless of credit score, while PMI rates increase significantly for scores below 680. A buyer with a 640 credit score will almost always pay less with FHA MIP than conventional PMI. Understanding credit score requirements for each loan type helps you make this comparison.

Maximum DPA stacking. FHA loans pair with more down payment assistance programs than conventional loans in many cases. The ability to stack Hometown Heroes with county SHIP and seller concessions is often more flexible with FHA, which can offset the higher long-term MIP cost.

Lower down payment. FHA requires 3.5% down versus 3% to 5% for conventional (depending on the program). The difference is small but can matter for buyers with very limited savings. Our guide on how much down payment you need covers the specifics.

What is the long-term cost difference?

On a $386,000 loan at 7% interest:

• UFMIP: $6,755 (financed)
• Annual MIP: $177/month for life of loan
• 10-year MIP cost: $21,240
• 30-year MIP cost (if never refinanced): approximately $47,000

• PMI: approximately $128/month
• PMI cancels at ~78% LTV (around year 9 with normal payments)
• Total PMI cost before cancellation: approximately $13,800

The conventional loan saves roughly $33,000+ in mortgage insurance over the life of the loan. But the FHA loan may provide access to more DPA programs and lower interest rates through HFA programs. Your lender should run both scenarios with your specific numbers. Check out our detailed PMI guide for more depth on how PMI affects monthly payments.

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Mortgage insurance is a cost of entry for most first-time buyers, but it does not have to be permanent. Call Barrett Henry, REALTOR, at (813) 733-7907. With 23+ years of real estate experience, Barrett connects buyers with lenders who explain both FHA and conventional options clearly.

Resources for First-Time Buyers

• PMI explained in detail
• FHA vs Conventional vs USDA
• Hometown Heroes guide
• how much down payment needed
• what credit score to buy a home
• mortgage calculator