FHA vs. Conventional Loan Calculator

The choice between FHA and conventional loans depends primarily on your credit score and down payment budget. Here's a quick comparison:

*MIP lasts for life of loan if down payment < 10%. If down payment ≥ 10%, MIP lasts 11 years.

The decision isn't just about comparing interest rates. FHA loans are typically easier to qualify for with lower credit scores, but they come with lifetime mortgage insurance (MIP) if your down payment is less than 10%. Conventional loans may have higher payments with low credit scores, but they allow PMI removal in the future without refinancing.

• Upfront Costs: FHA adds 1.75% to your loan balance upfront (UFMIP), which increases your principal and the interest you pay over time.
• Monthly Savings: See how much lower your payment will be after PMI expires in a conventional loan (typically at 78% LTV).
• Long-term Impact: Compare the total amount of interest and insurance you'll pay over 30 years.
• Credit Score Impact: Understand how your credit score affects PMI rates (0.3% to 1.5% annually) and overall loan costs.

FHA loans require two types of mortgage insurance premiums (MIP):

• Upfront MIP (UFMIP): 1.75% of the base loan amount, added to your loan balance. You pay interest on this amount for the life of the loan.
• Annual MIP: Paid monthly. For 30-year loans with less than 5% down, the rate is 0.55% annually. For loans with 5% or more down, it's 0.50%.
• MIP Duration: If your down payment is less than 10%, MIP lasts for the entire loan term. If your down payment is 10% or more, MIP lasts for 11 years.
• Removal: To remove MIP before the loan term ends, you must refinance to a conventional loan (if you have sufficient equity).

Conventional loans require PMI when your down payment is less than 20%:

• PMI Rates: Range from 0.3% to 1.5% annually, based on your credit score and loan-to-value (LTV) ratio. Higher credit scores and lower LTV ratios result in lower PMI rates.
• Automatic Removal: PMI is automatically removed when your loan balance reaches 78% of the original home value (LTV ≤ 78%).
• Request Removal: You can request PMI removal when your LTV reaches 80% if you've made on-time payments for at least 2 years.
• No Upfront Cost: Unlike FHA's UFMIP, conventional PMI has no upfront cost—you only pay monthly premiums until removal.

FHA loans are ideal for certain borrowers:

• Low Credit Score: If your credit score is below 620, FHA may be your only option (minimum 500, but 580+ for 3.5% down).
• Small Down Payment: FHA allows 3.5% down, making homeownership accessible with less cash upfront.
• First-Time Buyers: FHA's flexible credit requirements help first-time buyers enter the market.
• Lower Interest Rates: FHA loans sometimes offer lower interest rates than conventional loans for borrowers with lower credit scores.

Conventional loans are better for borrowers who:

• Good Credit Score: With a credit score of 720+, you'll get competitive PMI rates (0.3-0.4%) and lower overall costs.
• 20% Down Payment: If you can put down 20% or more, you avoid PMI entirely, making conventional loans significantly cheaper.
• Investment Properties: Conventional loans allow investment properties and second homes, while FHA loans are limited to primary residences.
• Want PMI Removal: If you want the ability to remove mortgage insurance without refinancing, conventional is the only option.

The biggest hidden cost of FHA loans is the Upfront Mortgage Insurance Premium (UFMIP). Even if you don't pay it out of pocket at closing, it increases your loan balance, which means you pay interest on it for 30 years.

• Example: On a $300,000 home with 3.5% down ($10,500), your base loan is $289,500. UFMIP adds $5,066.25 to your loan, making your total loan $294,566.25.
• Interest Impact: Over 30 years at 6% interest, you'll pay approximately $5,800 in interest just on the UFMIP amount.
• Comparison: Conventional loans have no upfront insurance cost, so your principal starts lower, reducing total interest paid.

Your credit score significantly affects both loan types:

• FHA Loans: Credit score affects your interest rate but not MIP rates (MIP is fixed based on down payment and term).
• Conventional Loans: Credit score directly affects PMI rates. A 760+ credit score can get PMI as low as 0.3%, while scores below 640 may pay 1.0% or more.
• Break-Even Analysis: With excellent credit (760+), conventional loans often become cheaper than FHA even with PMI, especially if PMI is removed early.

Many borrowers start with FHA and refinance to conventional later:

• When to Refinance: Once your credit score improves or home value increases (reaching 20% equity), refinancing to conventional can eliminate MIP.
• Costs: Refinancing involves closing costs (typically 2-5% of loan amount), so calculate your break-even point.
• Timing: If you plan to stay in the home long-term and can get a competitive conventional rate, refinancing often makes sense.
• Strategy: Use this calculator to model both scenarios—starting with FHA vs. starting with conventional—to see which saves more over time.

Here are realistic scenarios showing how FHA vs. Conventional compares:

• Scenario 1 - Low Credit Score (620): $400,000 home, 5% down, 6.5% FHA rate, 7.0% conventional rate. FHA monthly payment: $2,450. Conventional: $2,520. FHA wins short-term, but conventional saves $15,000+ over 30 years due to PMI removal.
• Scenario 2 - Good Credit Score (750): $400,000 home, 5% down, 6.0% FHA rate, 5.75% conventional rate. Conventional monthly payment: $2,180. FHA: $2,350. Conventional saves $170/month and $25,000+ over loan life.
• Scenario 3 - 20% Down Payment: $400,000 home, 20% down, 6.0% rate for both. Conventional: $1,920/month (no PMI). FHA: $2,050/month (MIP required). Conventional clearly wins.

Use this checklist after running your numbers:

• Check Your Credit Score: 620+ opens conventional options. Below 620, FHA may be your only choice.
• Calculate Total Costs: Don't just compare monthly payments—compare total costs over 30 years including all insurance.
• Consider Your Timeline: If you plan to stay 10+ years, PMI removal in conventional loans can save thousands.
• Factor in UFMIP: Remember that FHA's 1.75% upfront MIP increases your loan balance and total interest.
• Plan for Refinancing: If starting with FHA, model when refinancing to conventional makes sense.
• Compare Rates: Get quotes for both loan types—sometimes FHA rates are lower, sometimes conventional.