Guide · 8 min read
FHA or Conventional With a Small Down Payment
The lower down payment is the visible difference. The invisible one — how long you pay mortgage insurance — decides which loan actually costs less.
At 3.5% down, FHA mortgage insurance runs for the entire 30-year term. At 10% down it stops after 11 years. That single rule can mean $43,890 of extra premiums on the same house.
On a $400,000 house with 3.5% down, an FHA loan finances $386,000 plus a 1.75% upfront premium of $6,755, for a base loan of $392,755. At 6.9% over 30 years that is $2,587 a month in principal and interest, plus $176.92 in monthly mortgage insurance — $2,764 total.
Put 10% down instead and the picture changes in two ways at once. The loan is smaller: principal and interest fall to $2,412, and the insurance rate drops to 0.5%, or $150 a month — $2,562 total. The all-in payment is $202 lower every month.
The rule that decides it
FHA prices its annual premium on two things: the loan-to-value ratio and the term. But the duration depends on something else entirely — whether your down payment reached 10%.
Below 10% down, the premium runs for the entire loan term. At or above it, the premium stops after 11 years. There is no way to shorten it later by paying the loan down; the duration is fixed at origination.
What that costs
Over 30 years at 3.5% down, the annual premium totals $63,690. At 10% down it totals $19,800. The difference is $43,890 — real money, and it arrives on top of a higher monthly payment for the first several years.
That is the whole argument against the smaller down payment, and it is a strong one. But it is not the only consideration.
When FHA still wins
- You do not have the extra down payment. $40,000 is not a number you can produce by wanting it more.
- Your credit score is below 620, where conventional pricing gets expensive or the loan is declined outright.
- Your debt-to-income ratio is high — FHA is more tolerant of it than conventional underwriting.
- You expect to refinance within a few years, which cuts the life-of-loan premium short before it does much damage.
Conventional has its own break-even
Conventional loans with less than 20% down also charge mortgage insurance, but it ends at 78% of the original value — typically within a few years of paying down, or immediately if values rise and you reappraise.
Conventional pricing also depends heavily on credit score. Above 740 the rate advantage is meaningful; below 680 it can disappear entirely and then FHA becomes the cheaper loan even with its longer insurance.
Frequently asked questions
Can I remove FHA mortgage insurance without refinancing?
Not on a loan with less than 10% down. The premium is set to run for the full term at origination. The only exit is to refinance into a conventional loan, which requires enough equity and a qualifying credit profile.
Is 3.5% always the minimum FHA down payment?
It is the minimum for borrowers with a credit score of 580 or better. Below 580 the minimum rises to 10%, which — conveniently — also shortens the insurance duration.
Does the FHA upfront premium get refunded?
Partially, and only if you refinance or sell within three years. The refund schedule declines over that period and is not something to count on when comparing loans.