Mortgage insurance premium
A mortgage insurance premium is the charge that makes FHA lending possible. Like private mortgage insurance it protects the lender, not the borrower — but its structure and its duration are meaningfully different, and the difference costs FHA borrowers a great deal of money.
Two premiums, not one#
The upfront premium is charged at closing as a percentage of the loan amount. It is almost always financed into the loan rather than paid in cash, which means the borrower begins with a balance slightly higher than the purchase price and pays interest on the premium for the whole term.
The annual premium is divided by twelve and collected with the monthly payment, exactly like PMI.
The duration problem#
This is the part that matters.
Conventional PMI ends. The borrower can request cancellation at eighty percent of original value and the servicer must terminate it at seventy-eight percent. It is a temporary cost attached to a temporary risk.
For most FHA loans written since 2013, the annual premium runs for the life of the loan. Equity makes no difference. A borrower can be at fifty percent loan-to-value and still be paying insurance against a risk that no longer plausibly exists.
What that changes#
It changes the refinance calculation entirely.
A conventional borrower refinances when rates improve enough to justify the costs. An FHA borrower has a second reason that has nothing to do with rates: escaping the premium. Refinancing into a conventional loan at the same rate can still be worth doing, purely because the insurance disappears once there is twenty percent equity.
Many FHA borrowers never run that calculation, because the premium is bundled into a payment they have stopped examining.
Why FHA still makes sense#
None of the above is an argument against FHA loans. They accept lower credit scores and smaller down payments than conventional lending, and for a great many buyers they are the only route to ownership at all.
The point is narrower: the insurance on an FHA loan is a starting condition, not a permanent one, and treating it as permanent leaves money on the table every month once the equity is there.
Where it shows up in distress#
An FHA payment includes a cost that a conventional payment at the same balance does not. On a household running close to the line, that difference is occasionally the whole margin — and unlike taxes or insurance premiums, it is one that a refinance can remove entirely.