FHA mortgage insurance is a required cost when you get a loan backed by the Federal Housing Administration. It protects lenders from default and makes it easier for borrowers with lower credit scores or smaller down payments to qualify for a home loan. If you're considering an FHA loan, understanding how this insurance works — and how much it adds to your mortgage — is essential.

What is FHA mortgage insurance?

FHA mortgage insurance is a requirement for all homebuyers using an FHA loan. Unlike private mortgage insurance (PMI), which only applies when conventional borrowers put down less than 20%, FHA insurance applies to all FHA loans regardless of down payment size. 

Its purpose is to protect lenders in case borrowers default. Because of this insurance, lenders are more willing to approve buyers with lower credit scores and smaller savings.

Why FHA mortgage insurance exists

The FHA doesn’t lend money directly. Instead, it insures loans made by approved lenders. If a borrower fails to repay, the FHA covers the lender’s losses. This protection is funded by the insurance premiums all FHA borrowers pay.

 While this adds cost to your mortgage, it also opens the door to homeownership for many who might not qualify for a conventional loan.

The two types of FHA mortgage insurance

There are two main components to FHA mortgage insurance:

1: Upfront mortgage insurance premium (UFMIP)

This is a one-time fee that equals 1.75% of your loan amount. It’s typically rolled into your mortgage balance, though you can pay it out of pocket at closing.

2: Annual mortgage insurance premium (MIP)

This is paid monthly as part of your mortgage payment. It’s calculated annually but divided into 12 installments. The rate depends on factors like your loan amount, loan term, and down payment.

For most borrowers with a loan term over 15 years who put less than 10% down, this MIP comes out to 0.55% annually. That said, it can range from .50% to 0.75% depending on loan size, term, and loan-to-value (LTV) ratio. Loans with a term of 15 years or less and at least 10% down may qualify for reduced MIP rates. 

How much does FHA mortgage insurance cost?

Let’s break down a basic example.

• Loan amount: $300,000
• Down payment: 3.5%
• Loan term: 30 years

Upfront MIP would be 1.75% of $300,000, which equals $5,250. Most borrowers roll this into the loan, bringing the total loan amount to $305,250.

Annual MIP would be 0.55% of the loan amount. That’s $1,679 per year or about $140 per month added to your mortgage payment.

Remember, these are general estimates. MIP rates can change, and your exact cost depends on your loan terms and lender.

How long do you have to pay FHA mortgage insurance?

One key difference between FHA mortgage insurance and private mortgage insurance is how long you’re required to keep it.

• If your down payment is less than 10%, you’ll pay MIP for the life of the loan
• If your down payment is 10% or more, MIP lasts 11 years

If you’re in the former camp, the only way to remove FHA mortgage insurance entirely is by refinancing into a conventional loan once you have at least 20% equity

This long-term requirement makes it especially important to factor MIP into your decision when choosing between FHA and conventional financing.

FHA mortgage insurance vs. private mortgage insurance

FHA mortgage insurance and private mortgage insurance (PMI) serve the same basic purpose but have some important differences.

FHA mortgage insurance:

• Is required on all FHA loans regardless of down payment
• Includes both upfront and monthly premiums
• Can’t be canceled (with <10% down) unless you refinance
• Is backed by the federal government

Private mortgage insurance:

• Is required on conventional loans with less than 20% down
• Gets paid monthly, sometimes with an upfront option
• Can be canceled once you reach 20% equity
• Is offered by private insurers

If you qualify for a conventional loan, it’s worth comparing PMI vs. FHA mortgage insurance costs, especially if you plan to stay in the home long-term.

Can FHA mortgage insurance be reduced?

FHA mortgage insurance rates are set by HUD and occasionally adjusted. For example, in early 2023, HUD reduced the annual MIP from 0.85% to 0.55% for most borrowers — a move that saves homeowners hundreds of dollars per year.

While you can’t negotiate MIP directly, you can lower your total cost by:

• Choosing a shorter loan term
• Making a larger down payment (10% or more)
• Refinancing into a conventional loan when you reach 20% equity
• Monitoring HUD updates for rate changes

Also, consider comparing FHA-approved lenders, as some may offer lower closing costs or better rate-lock options that can reduce your overall expenses.

Should you get an FHA loan with mortgage insurance?

FHA loans with mortgage insurance can be a smart choice for certain buyers, especially those who:

• Have a credit score under 680
• Don’t have 20% saved for a down payment
• Have higher debt-to-income ratios
• Need more flexible qualifying criteria

However, if you have strong credit and a sizable down payment, a conventional loan might be more cost-effective in the long run — especially since PMI can be canceled.

Use a side-by-side loan comparison to evaluate both options. Factor in:

• Monthly payments (including insurance)
• Upfront costs
• Long-term insurance obligations
• Refinance potential

A higher monthly payment today may still be worth it if it gets you into a home sooner or locks in a good rate.

Crunching the numbers for yourself

FHA mortgage insurance makes homeownership more accessible — but it also adds cost. With both upfront and ongoing premiums, it’s important to understand how much you’ll pay and how long you’ll be paying it. FHA loans offer flexibility and lower barriers to entry, but the lifetime MIP requirement can be a disadvantage if you don’t plan to refinance.

Compare FHA loans against conventional options to make the most informed decision. Even small differences in insurance rates, loan terms, or interest rates can have a major impact over time.

Ready to learn more about your options?

Use our mortgage comparison tool to estimate your costs, compare lenders, and find the best rate for your budget. Whether you’re buying your first home or exploring financing options, we’re here to help you make a confident move.