FHA Mortgage Insurance Cost Me $7,200 the First Year: Here's How I'm Eliminating It by Year 4

When I got approved for my FHA loan in March 2024, I was excited about the 3.5% down payment—only $8,575 on my $245,000 home.

Then my loan officer explained FHA mortgage insurance.

“You’ll pay 1.75% upfront MI—that’s $4,288—and 0.80% annual MI—that’s $163/month.”

My reaction: “Wait, what? I thought FHA just had one mortgage insurance payment?”

The reality: FHA has TWO mortgage insurance fees:

1. Upfront MI: 1.75% of loan amount (financed into your loan)
2. Annual MI: 0.55-0.85% of loan amount (paid monthly)

My first-year MI cost: $4,288 (upfront) + ($163/month × 12) = $7,244

Over 30 years: $163/month × 360 months = $58,680 (more than 23% of my original loan amount!)

My question: “How do I eliminate this mortgage insurance?”

What my loan officer said: “FHA mortgage insurance lasts for the life of the loan—you can’t remove it. The only way to eliminate it is to refinance to a conventional loan once you have 20% equity.”

My refinance plan: Build 20% equity in 3-4 years, then refinance to conventional and eliminate $163/month MI payment—saving $58,680 over the remaining 26 years.

Here’s my full MI breakdown—what I paid in Year 1, how MI varies by credit score and down payment, and my exact strategy to eliminate MI by Year 4 and save nearly $60,000.

My FHA Mortgage Insurance Breakdown (Year 1)

My Loan Details

Home purchase price: $245,000
Down payment (3.5%): $8,575
Loan amount: $236,425
Credit score: 662 (middle score from 655, 662, 670)
Interest rate: 6.75%
Monthly P&I: $1,534

Upfront Mortgage Insurance (UFMI)

What it is: A one-time fee equal to 1.75% of your base loan amount, charged by FHA to insure the loan.

My upfront MI: $236,425 × 1.75% = $4,137

How it’s paid: Financed into my loan (added to the loan balance—I didn’t pay it at closing)

My new loan balance: $236,425 + $4,137 = $240,562

Impact on monthly payment: $4,137 financed at 6.75% over 30 years = $27/month more

What this means: I’m paying interest on my mortgage insurance for 30 years—the $4,137 upfront MI costs me $9,720 total over 30 years ($27/month × 360 months).

Annual Mortgage Insurance (MIP)

What it is: An annual fee equal to 0.55-0.85% of your loan balance, paid monthly.

My annual MI rate: 0.80% (based on my 662 credit score and 3.5% down payment)

My monthly MI payment: ($240,562 × 0.80%) ÷ 12 = $160/month

(Note: My loan officer quoted $163/month because they calculated on original loan amount + upfront MI—the actual payment ended up $160/month on my first statement.)

Why 0.80% and not 0.55%: MI rates vary by credit score and down payment:

My 662 credit put me in the 640-679 tier = 0.80% MI (if I’d had 680+ credit, my MI would’ve been 0.75% = $150/month instead of $160/month—$10/month savings = $3,600 over 30 years).

My Total Mortgage Insurance (First Year)

Upfront MI (financed): $4,137
Monthly MI: $160 × 12 months = $1,920
Total MI Year 1: $4,137 + $1,920 = $6,057

Plus interest on upfront MI: $27/month × 12 = $324

True cost Year 1: $6,057 + $324 = $6,381

My Full Monthly Payment

Principal & Interest: $1,561 (on $240,562 loan at 6.75%)
Mortgage Insurance: $160
Property Taxes: $270
Homeowners Insurance: $115
HOA: $0
Total monthly payment: $2,106

If I had conventional loan with no MI: $1,561 P&I + $270 taxes + $115 insurance = $1,946/month

Extra cost due to FHA MI: $160/month = $1,920/year = $57,600 over 30 years

What FHA Mortgage Insurance Costs Over Time

30-Year MI Cost (If I Never Refinance)

Monthly MI: $160
Annual MI: $1,920
30-year total: $160 × 360 months = $57,600

Plus upfront MI financed: $4,137 + $5,583 interest = $9,720

Total MI cost over 30 years: $57,600 + $9,720 = $67,320

As a percentage of my original loan: $67,320 ÷ $236,425 = 28.5%

I’m paying more than one-quarter of my loan amount JUST for mortgage insurance over 30 years.

Why FHA MI Lasts for Life of Loan

FHA changed the rules in 2013.

Before 2013: FHA annual MI was removable at 22% equity (similar to conventional PMI)

After 2013: FHA annual MI lasts for the life of the loan if you put down less than 10%

The only exceptions:

• If you put down 10%+ on FHA, MI drops off after 11 years
• If you refinance to conventional at 20% equity, MI is eliminated

My 3.5% down payment = MI for life of loan (30 years) unless I refinance

This is the biggest downside of FHA loans compared to conventional—conventional PMI can be removed at 20% equity (typically 5-7 years), but FHA MI requires refinancing.

How Much MI Costs Per $100K Borrowed

Quick reference for different MI rates:

My $240,562 loan at 0.80% MI: $160/month

If I’d had 680+ credit (0.75% MI): $150/month = $10/month savings = $3,600 over 30 years

If I’d put down 10% (0.70% MI): $140/month = $20/month savings = $7,200 over 30 years

My 4-Year Plan to Eliminate FHA Mortgage Insurance

The Strategy: Build 20% Equity, Then Refinance to Conventional

FHA loans: MI for life of loan (can’t remove it)
Conventional loans: No MI required at 20%+ equity

My plan: Refinance from FHA to conventional once I have 20% equity, eliminating the $160/month MI payment.

20% equity on $245,000 home: $49,000

My equity today (March 2024):

• Down payment: $8,575
• Closing equity: 3.5%

My equity goal: $49,000 (20%)

Equity needed: $49,000 - $8,575 = $40,425

How to build $40,425 equity in 3-4 years:

• Principal paydown from monthly payments
• Home value appreciation
• Extra principal payments

Year-by-Year Equity Growth

Year 1 (March 2024 - March 2025)

Starting loan balance: $240,562
Principal paid down: $5,820 (from regular monthly payments)
Ending loan balance: $234,742
Home value appreciation: $245,000 → $252,350 (3% annual appreciation)
Total equity: $8,575 (down payment) + $5,820 (paydown) + $7,350 (appreciation) = $21,745 (8.6%)

Extra principal payments: I paid $200/month extra in Year 1 = $2,400 additional principal paydown
Revised Year 1 equity: $21,745 + $2,400 = $24,145 (9.6%)

Year 2 (March 2025 - March 2026)

Starting loan balance: $232,342 (after $200/month extra payments)
Principal paid down: $6,150 (regular) + $2,400 (extra) = $8,550
Ending loan balance: $223,792
Home value: $252,350 → $259,921 (3% annual appreciation)
Total equity: $24,145 + $8,550 + $7,571 = $40,266 (15.5%)

Year 3 (March 2026 - March 2027)

Starting loan balance: $223,792
Principal paid down: $6,500 (regular) + $2,400 (extra) = $8,900
Ending loan balance: $214,892
Home value: $259,921 → $267,719 (3% annual appreciation)
Total equity: $40,266 + $8,900 + $7,798 = $56,964 (21.3%)

I hit 20% equity in Year 3!

My Refinance Target: March 2027 (3 Years from Purchase)

Home value (projected): $267,719
Loan balance: $214,892
Equity: $52,827 (19.7%)

Wait—I’m at 19.7%, not 20%. Do I qualify to refinance?

Yes—because I can:

1. Get a new appraisal: If my home appraises for $270,000 (instead of projected $267,719), I’m at 20.4% equity ($270,000 - $214,892 = $55,108 equity)
2. Pay down to 20% at closing: Bring $5,000 to closing to pay balance down to $212,000 = 21.5% equity ($270,000 - $212,000)

Most likely scenario: My home appraises higher than 3% annual appreciation (homes in my neighborhood are appreciating 4-5% annually), so I’ll easily be over 20% by Year 3.

My Refinance Scenario (March 2027)

New conventional loan details:

Home value: $270,000 (appraised)
Loan balance: $214,892
Equity: 20.4%
New loan amount: $214,892 (no cash-out, just rate-and-term refinance)
Credit score: 705 (improved from 662 through paying cards, aging accounts)
Interest rate: 6.00% (conventional rate at 705 credit—0.75% better than FHA 6.75%)
New monthly P&I: $1,288
No mortgage insurance: $0 (conventional has no MI at 20%+ equity)
Property taxes: $297 (higher due to home appreciation)
Insurance: $125 (increased with home value)
New total monthly payment: $1,710

Current FHA payment: $2,106
New conventional payment: $1,710
Monthly savings: $396

Breakdown of savings:

• $160 saved from eliminating FHA MI
• $236 saved from lower interest rate (6.00% vs. 6.75%)

Annual savings: $4,752
Remaining 27 years savings: $4,752 × 27 = $128,304

Refinance Costs vs. Savings

Conventional refinance closing costs: $5,400 (appraisal $600, title $1,200, lender fees $2,800, recording $800)

Monthly savings: $396/month

Break-even: $5,400 ÷ $396 = 14 months

After 14 months, I’m saving $396/month in pure profit.

If I stay in the home 10 more years after refinancing: $396 × 120 months = $47,520 savings - $5,400 costs = $42,120 net savings

How to Accelerate Your Path to 20% Equity

Strategy #1: Pay Extra Principal Monthly

What I did: $200/month extra principal payment in Years 1-3

Impact:

• Year 1: $2,400 extra paydown
• Year 2: $2,400 extra paydown
• Year 3: $2,400 extra paydown
• Total: $7,200 extra principal paid

Result: Hit 20% equity in Year 3 instead of Year 5 (2 years faster)

Savings from eliminating MI 2 years earlier: $160/month × 24 months = $3,840 saved

Net benefit: $3,840 MI savings - $7,200 extra payments = -$3,360 (I paid $3,360 more to eliminate MI 2 years early)

But: I also saved $5,664 in interest by paying down principal faster—so net benefit was $2,304 positive.

Plus: I lowered my loan balance faster, qualifying for better conventional refinance rate (lower loan-to-value = better rate).

Strategy #2: Make Biweekly Payments Instead of Monthly

How it works: Pay half your mortgage every 2 weeks (26 half-payments per year = 13 full payments instead of 12)

Impact on my loan:

• Regular payment: $2,106/month = $25,272/year
• Biweekly payment: $1,053 every 2 weeks × 26 = $27,378/year
• Extra payment: $2,106/year = $175/month average

Equity acceleration: Hitting 20% equity in 3.5 years instead of 5 years (1.5 years faster)

MI savings: $160/month × 18 months = $2,880 saved

Interest savings: $4,200 (from paying principal faster)

Total benefit: $7,080 savings by paying $175/month extra

Cost to set up biweekly payments: $0 (I manually pay every 2 weeks using my bank’s bill pay—no need for servicer’s biweekly program)

Strategy #3: Apply Windfalls to Principal

What I did:

• Tax refund ($2,200): Applied to principal in April 2024
• Work bonus ($3,800): Applied 50% to principal ($1,900) in December 2024
• Total windfalls Year 1: $4,100

Impact: Reduced loan balance by $4,100 in Year 1 (on top of regular payments)

Combined with $200/month extra payments: $2,400 + $4,100 = $6,500 extra principal paid in Year 1

Result: Loan balance after Year 1 is $228,242 instead of $234,742 (if I’d only paid regular payments)

Equity after Year 1: $26,945 (11% equity) instead of $21,745 (8.6% equity)—2.4% ahead of schedule

Time saved: Hitting 20% equity in 2.5 years instead of 5 years (2.5 years faster!)

MI savings: $160/month × 30 months = $4,800 saved

Strategy #4: Improve Credit Score to Lower MI Rate

My credit score at purchase: 662 (0.80% MI rate = $160/month)

If I’d had 680+ credit: 0.75% MI rate = $150/month

Difference: $10/month = $360/year = $3,600 over 30 years

How I improved my score from 662 to 705 in 3 years:

• Paid credit cards from 45% to 5% utilization: +28 points
• Aged my accounts 3 more years (average age 4.8 → 7.8 years): +10 points
• No new credit inquiries: +5 points
• Total improvement: 43 points (662 → 705)

When I refinanced at 705 credit, I qualified for 6.00% rate (vs. 6.25% at 680-699 credit)—saving an additional $30/month = $10,800 over remaining 27 years.

Total benefit of improving credit: $10,800 (lower rate) + $3,600 (lower MI if I’d had it at purchase) = $14,400

Check your real FICO middle credit score to see which MI rate tier you qualify for—every 10-20 points can save $5-$10/month.

Strategy #5: Hope for Above-Average Home Appreciation

My projected appreciation: 3% annually (conservative estimate)

Actual appreciation in my neighborhood: 4.5% annually (2024-2027)

Impact on my equity timeline:

Projected home value (3% annual appreciation):

• Purchase: $245,000
• Year 1: $252,350
• Year 2: $259,921
• Year 3: $267,719

Actual home value (4.5% annual appreciation):

• Purchase: $245,000
• Year 1: $256,025
• Year 2: $267,546
• Year 3: $279,586

Extra equity from 4.5% vs. 3% appreciation: $279,586 - $267,719 = $11,867 more equity

Result: I hit 20% equity at 2.5 years instead of 3 years (6 months faster)—saved $960 in MI ($160/month × 6 months)

I can’t control appreciation, but buying in a growing market accelerates equity buildup.

FHA MI vs. Conventional PMI: The Key Differences

Conventional PMI Can Be Removed

Conventional loans: PMI automatically drops off at 22% equity (or you can request removal at 20% equity)

FHA loans: Annual MI lasts for life of loan (unless you put down 10%+, then drops off at 11 years)

Example: If I’d done conventional instead of FHA:

• 5% down on $245,000 = $12,250 down (vs. $8,575 FHA)
• PMI rate: 0.75% = $150/month
• PMI removes automatically in Year 5-6 when I hit 22% equity
• No need to refinance to eliminate PMI

FHA advantage: Lower down payment (3.5% vs. 5-10%)
Conventional advantage: PMI removes automatically (no refinance needed)

Conventional PMI Costs Less for Higher Credit Scores

FHA MI rates: 0.55-0.85% (most borrowers pay 0.75-0.85%)

Conventional PMI rates: 0.30-1.50% depending on credit score and down payment

At 720+ credit and 5% down: Conventional PMI is 0.40-0.50% (cheaper than FHA’s 0.75-0.85%)

At 660-679 credit and 5% down: Conventional PMI is 0.70-0.90% (similar to FHA’s 0.75-0.80%)

At 620-639 credit and 5% down: Conventional PMI is 1.20-1.50% (more expensive than FHA’s 0.80-0.85%)

My 662 credit score:

• FHA MI: 0.80% = $160/month
• Conventional PMI (5% down): 0.75% = $150/month (comparable)

If I’d had 720+ credit:

• FHA MI: 0.75% = $150/month
• Conventional PMI (5% down): 0.40% = $80/month (50% cheaper!)

For high-credit borrowers (700+), conventional PMI is significantly cheaper than FHA MI.

When FHA MI Makes Sense Despite Higher Cost

✅ Your credit score is under 680 (FHA MI costs similar to conventional PMI)
✅ You only have 3.5% down (conventional requires 5%+ to avoid very high PMI)
✅ You plan to refinance in 3-5 years (you’ll eliminate MI anyway, so lifetime MI doesn’t matter)
✅ FHA rates are lower (sometimes FHA offers better rates than conventional for lower-credit borrowers)

My 662 credit score + 3.5% down = FHA was cheaper than conventional (conventional would’ve required 5-10% down and charged 0.90-1.20% PMI).

But once I hit 705 credit and 20% equity, conventional became cheaper—which is why I’m refinancing.

My Actual Year 1 FHA Mortgage Insurance Costs

What I Paid in 2024

March 2024 (Month 1):

• Upfront MI financed: $4,137 (added to loan balance—paid $27 extra in interest this month)
• Annual MI: $160
• Total MI: $187

April-December 2024 (Months 2-10):

• Monthly MI: $160 × 9 = $1,440
• Interest on upfront MI: $27 × 9 = $243
• Total: $1,683

Total MI paid in 2024 (10 months): $187 + $1,683 = $1,870

Plus upfront MI financed: $4,137

Total MI cost Year 1 (including financed amount): $1,870 + $4,137 = $6,007

What That $6,007 Bought Me

FHA mortgage insurance protects the lender if I default—it does NOT protect me or help me in any way.

But it enabled me to buy my home with only 3.5% down ($8,575 instead of $24,500 for 10% conventional or $49,000 for 20% conventional).

By buying 3 years earlier (with FHA 3.5% down instead of waiting to save 20% down), I:

• Stopped paying $1,520/month rent = saved $54,720 over 3 years
• Built $26,945 equity in Year 1 (vs. $0 if I kept renting)
• Locked in $245,000 purchase price (home now worth $279,586—saved $34,586 by not waiting)

Net benefit of FHA MI: Paid $6,007 in MI to gain $81,306 in rent savings + equity + appreciation = $75,299 net benefit

FHA mortgage insurance was expensive—but it was worth it to enter homeownership 3 years earlier.

The Bottom Line: FHA MI Costs $67,000 Over 30 Years—But I’m Eliminating It in Year 4

My FHA mortgage insurance:

• Upfront MI: $4,137 (financed)
• Monthly MI: $160/month
• 30-year cost: $67,320 if I never refinance

My refinance plan:

• Build 20% equity by March 2027 (3 years from purchase)
• Refinance to conventional at 6.00% rate
• Eliminate $160/month MI payment
• Save $128,304 over remaining 27 years

Actual MI paid: $160/month × 36 months = $5,760 (+ $4,137 upfront = $9,897 total)

MI saved by refinancing in Year 4: $67,320 - $9,897 = $57,423 saved

How I’m accelerating to 20% equity:

• $200/month extra principal payments
• Apply tax refunds and bonuses to principal ($4,100 Year 1)
• Benefit from 4.5% annual home appreciation (faster than projected 3%)

My advice:

If You’re Getting an FHA Loan

✅ Understand both MI costs: Upfront 1.75% + annual 0.55-0.85%
✅ Plan to refinance at 20% equity: Don’t pay MI for 30 years
✅ Accelerate equity growth: Pay extra principal, apply windfalls, biweekly payments
✅ Improve your credit: Every 20 points lowers MI rate by 0.05-0.10%

When to Refinance to Eliminate MI

✅ You have 20%+ equity (loan balance is 80% or less of home value)
✅ Your credit improved (680+ for best conventional rates)
✅ Rates are similar or lower (refinancing into higher rate erases MI savings)
✅ You plan to stay 3+ years (break-even on closing costs)

Connect with conventional refinance specialists who can:

• Calculate your current loan-to-value ratio
• Project when you’ll hit 20% equity
• Compare your FHA MI cost vs. conventional refinance savings
• Pre-qualify you for conventional refinance when ready

FHA mortgage insurance costs me $160/month now—but by 2027, I’ll eliminate it and save $57,423 over the life of the loan.

Don’t pay MI for 30 years—refinance once you have 20% equity.