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Private mortgage insurance (PMI) and HUD’s FHA mortgage insurance (made up of both up front and monthly premiums), similarly protect the mortgage lenders or investors in the case of default. 

The major difference is that PMI is automatically cancelled when the loan balance reaches a 78% loan to value (LTV) using the lower of the original purchase price or appraised value or when the borrower can prove 20% equity.

The mortgage loan will also have to be current with a good payment history for the last 12 months. 

PMI can also be paid as a single upfront cost. Many times this cost can be paid by the seller and allow for an overall mortgage payment. 

HUD’s FHA mortgage insurance is typically not cancelled at any time during the life of the loan. 

In addition, not only is a monthly premium required as described above, there is an upfront premium, currently 1.75% of the loan amount due at closing, which can be financed into the loan or paid in cash like the other closing costs found in a mortgage loan and may also be paid by the seller.  Generally, the entire upfront mortgage insurance premium or UFMIP is financed in the mortgage amount.

Let’s look at standard  example:

Let’s say you are buying a 300,000 down and you can pay 5% down or up to $15,000.00   We will assume a 30 year mortgage with excellent an credit score of 725. 

                                                               Conventional                            FHA

Down Payment                                   $15,000 (5%)                             $10,500 (3.5%)

Loan Amount                                      $285,000.00                              $294,566.00*  Rate                                                      5.000%                                        4.750%

Mortgage Payment                           $1,529.94                                    $1,536.60

Ins.Payment                                       $   178.13  (rate .75%)               $   208.65 (.85%                                                                                                                                        rate)

TOTAL MORTGAGE PMT:               $1,708.07                                   $1,745,25 

                                                                                              *(includes financed UPFMIP)

In seven years or 84 months you would have paid a total of $158,477.88 in mortgage payments including your down payment (1708.07 x 84 + $15,000) and $157,101.00 on the FHA loan. Not a significant difference in total costs but your FHA monthly payment is higher but the trade off is you have $4,500 reserves because the down payment was smaller. Of course if the interest rates were the same for both programs the FHA loan would cost more.   

However, what if at the end of four years the property had appreciated enough where there was 20% equity in your home. On a conventional loan you can pay for an appraisal to remove the PMI while you cannot do so with an FHA loan. In this case if the PMI was removed for years 5 through seven, the conventional mortgage loan would have only cost a total of $137,065.30. This is a significant difference in costs. 

NOTE: Mortgage Insurance payment was calculated by using Premium Rate x Loan Amount = Annual Premium, dived by 12 for monthly payment. In this example we started with .75%) but in years 11 on the rate will be reduced to .20%.