Put down less than 20% on most home loans and some form of mortgage insurance enters the picture. It protects the lender — not you — against default, but you pay for it, so it directly affects your monthly payment and your deal math. The three major loan families handle it very differently, and knowing the differences can change which financing route makes sense.
Here is how FHA, VA, and conventional loans each approach mortgage insurance, using the standard program fee structures.
FHA: Mortgage Insurance Premium (MIP)
FHA loans charge mortgage insurance in two parts:
- Upfront MIP of 1.75% of the loan amount under current FHA program rules. Most borrowers finance this into the loan rather than paying cash at closing, which raises the starting balance.
- Annual MIP of roughly 0.50-0.55% of the loan balance under current FHA program rules, divided into twelve monthly installments and added to your payment. Your lender's Loan Estimate states the exact premium for your specific loan.
The exact annual rate depends on your loan amount, term, and down payment. A key quirk: with the standard low down payment, FHA MIP generally lasts for the life of the loan — the usual way to remove it is to refinance into a conventional loan once you have enough equity.
VA: The Funding Fee
VA loans, available to eligible veterans, service members, and some surviving spouses, take a different approach: there is no monthly mortgage insurance at all. Instead, the program charges a one-time funding fee, typically between 1.25% and 3.3% of the loan amount, which most borrowers finance into the loan.
Where you land in that range depends on two things:
- Down payment. Larger down payments earn a lower fee tier.
- Prior use. First-time use of the VA benefit carries a lower fee than subsequent uses.
One major exemption: veterans receiving compensation for a service-connected disability (and certain surviving spouses) are exempt from the funding fee entirely. If that applies to you, the VA loan's cost structure becomes hard to beat, since you avoid both the fee and any monthly insurance.
Conventional: Private Mortgage Insurance (PMI)
Conventional loans require private mortgage insurance when your down payment is under 20% — in other words, when your loan-to-value (LTV) ratio is above 80%. Unlike FHA's mostly flat structure, PMI pricing is risk-based: your premium depends heavily on your credit score and your LTV. Strong credit with 15% down might cost a fraction of what weaker credit with 3% down costs.
PMI's biggest advantage is that it is removable. You can request cancellation once you reach 20% equity, and it must be terminated automatically at 22% equity on the original amortization schedule. For borrowers with good credit, conventional financing with PMI often beats FHA over a long hold precisely because the insurance eventually goes away on its own.
How to Compare Them
There is no universally cheapest option — it depends on your credit, down payment, eligibility, and how long you plan to keep the loan. A few guiding questions:
- Do you qualify for a VA loan? The lack of monthly insurance is a significant structural advantage.
- Is your credit strong? Conventional PMI may be inexpensive and cancellable.
- Is your credit thinner or your down payment small? FHA's flat premium structure may pencil better, with a refinance later to shed MIP.
Whatever route you take, put the real numbers into your analysis. The free Shouldirefi Deal Analyzer lets you include mortgage insurance in your monthly payment estimate so your cash flow and effective housing cost reflect what you would actually pay — not just principal and interest.
All figures are estimates for informational purposes only — not financial advice. Consult a qualified professional before making financial decisions.