How Much More an FHA Loan Costs a First-Time Buyer Over Time

The Quick Read: The extra cost comes from two mortgage insurance charges. One is paid up front and usually financed. The other is paid monthly, and it can last as long as the loan. How much more you pay depends on your down payment, how long you keep the loan, and whether you refinance later. Buyers who sell or refinance within a few years pay far less of it than buyers who hold for decades.

Key takeaways

• FHA charges an upfront premium of 1.75% of the base loan, usually rolled into the balance.
• The annual premium runs between 0.15% and 0.75% of the balance. It depends on term, loan amount and LTV (loan-to-value, meaning the loan as a share of the home’s value).
• With a 30-year term and less than 10% down, the annual premium lasts the whole term. With 10% or more down, it ends after eleven years.
• The cost is real, but so is the benefit: a 3.5% minimum investment from a 580 decision score.
• Terms vary by lender and borrower, and nothing here is a commitment to lend.

Where Does the Extra Cost Come From?

FHA loans cost more over time mainly because of two separate insurance premiums. The insurance protects the lender, not you, and you pay for it. The note itself is only part of the story.

Here is how the pieces work across the wholesale programs Lendmire places FHA files with. Learn the structure first and the numbers make sense.

The upfront premium. This is 1.75% of the base loan, meaning the loan before the premium is added. Most buyers finance it. That keeps cash to close lower, but the premium then sits in your balance and earns interest for as long as you hold the loan. HUD’s Mortgagee Letter 2023-05 sets the 1.75% figure for FHA mortgages generally and lists a few narrow exceptions.

The annual premium. You pay this monthly as part of your housing payment. The percentage runs from 0.15% to 0.75% of the balance per year. Where you land depends on three things: the loan term, the loan amount and the LTV. Because it is charged on the balance, the dollar amount shrinks as you pay down principal. The percentage does not reset.

Together, these two charges are why an FHA loan is not simply “a loan with a smaller down payment.” The right comparison is the whole cost of the loan over your actual holding period.

You can see the full program on Lendmire’s page for FHA loan programs. The rest of this article focuses on the cost.

How the Cost Builds Over Time

The premium is not a flat cost. It builds with each year you hold the loan, and the biggest jump comes from how long the annual premium lasts.

On a 30-year loan above 90% LTV, the annual premium lasts for the term. That is the standard case for a first-time buyer putting down the 3.5% minimum. At or below 90% LTV, it ends after eleven years. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Here is the shape of the cost at different holding periods. These are directional, not dollar totals.

Two things shape the curve. First, the upfront premium is a one-time charge, but financing it means interest on it every year. Second, the annual premium shrinks in dollars as the balance falls, so the early years carry the heaviest share.

One more detail: the LTV used to set the annual premium is figured on the loan without the upfront premium. That keeps the financed piece from pushing you into a higher tier.

When Is the Gap Bigger or Smaller?

The gap is biggest for buyers with a thin down payment who keep the loan for decades. It is smallest for buyers who put down more or who move on early.

Credit matters in a different way than most people expect. FHA premium tiers come from term, amount and LTV, not from your credit score. Conventional mortgage insurance usually prices off your score. So a buyer with very strong credit often finds conventional cheaper over time. A buyer in the 580 range may find the opposite, or may find conventional unavailable.

The CFPB notes that lenders generally require private mortgage insurance when the down payment is under 20%. So low-down-payment buyers face mortgage insurance either way. The question is which version costs less for your file.

What the Lower Cash Requirement Buys You

The FHA’s extra cost is partly the price of getting in. The maximum financing is 96.5% LTV with a 3.5% minimum investment, available from a 580 decision score. For many first-time buyers, that is the difference between buying now and saving for several more years. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

Think of it as a trade. You keep more cash in your pocket today. You pay more insurance over the years. Whether that trade works depends on what waiting would cost you.

Some questions help here:

• Would saving a larger down payment take longer than you are willing to wait?
• Are you likely to stay in this home past eleven years?
• Is your credit strong enough for conventional pricing that beats FHA?

The 3.5% is also not a loophole. According to the Congressional Research Service, the 3.5% requirement came from a 2008 law that replaced an earlier 3%. It also notes that prohibited sources include the home seller and anyone who benefits from the sale. Gift funds and other approved sources can cover it. Seller contributions to closing costs are a separate matter and can run up to 6% of the price on these programs.

Why a Lower Rate Does Not Mean a Lower Cost

An FHA loan can carry a lower note rate and still cost more in total. The insurance premiums sit on top of the note and are not captured in it.

So never compare an FHA offer and a conventional offer by the note alone. Compare the full Loan Estimate for each: the premiums, the financed amounts and the monthly total. A lower note on a loan with a financed premium and a permanent annual charge is not automatically the cheaper loan.

Can You Shrink the Extra Cost?

Yes. Three levers work, and the first is the strongest.

Refinance into a non-FHA loan. This ends the annual premium. Once you have enough equity and credit, a conventional refinance can remove FHA insurance. HUD’s own page says the borrower must ask the mortgage company what it requires. There is no right to ask for removal once you reach 20% equity, as there is with private mortgage insurance.

Put more down at purchase. At or below 90% LTV, the annual premium ends after eleven years instead of lasting the term. Moving from the minimum down payment to 10% down changes the lifetime cost sharply. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Pay down principal. The annual premium is charged on the balance. Extra principal shrinks it in dollars.

Refinance options matter here, and the details count. The FHA Streamline refinances an existing FHA loan with no appraisal, a limited credit review and a net tangible benefit. But the premium continues. It lowers your payment, not your insurance. An FHA rate-and-term refinance with an appraisal reaches 97.75% on a principal residence you have occupied for the previous twelve months. An FHA cash-out reaches 80% LTV on a home you have owned and occupied for 12 months before the case number. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

Where the General Rule Breaks

The “extra cost” story has exceptions. Know them so you can spot advice that does not apply to you.

• Older FHA loans. Loans with case numbers assigned before June 3, 2013 follow older cancellation rules. HUD says some can end at 78% LTV on the original schedule. Advice written for those loans does not fit a new purchase.
• Streamlines of very old FHA loans. Certain Streamline and Simple Refinances of loans endorsed on or before May 31, 2009 are exempt from the standard premiums, per Mortgagee Letter 2023-05.
• Special land programs. Hawaiian Home Lands loans skip the annual premium, and Indian Lands loans skip the upfront premium.
• Other FHA products. Reverse mortgages and Title I loans do not follow these rules, per the CRS overview.
• Loan limits. County loan limits apply and change every year. They affect eligibility and which premium tier you fall into. Check your county before you shop.
• Occupancy. FHA is for your principal residence only, one to four units. It does not cover investment property. A non-occupant co-borrower is allowed. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

A higher appraisal later will not remove the premium either. HUD’s cancellation rules use the original schedule and do not credit new appraised values.

Is FHA Still the Right Call?

For many first-time buyers, yes, especially with limited savings or a score that conventional underwriting will not price well. For others, it is not.

FHA tends to win when:

• Your score is near the floor and conventional insurance would be costly or unavailable.
• You need the 3.5% minimum to buy at all.
• Your debt load is high. The base ratios are 31/43 (housing and total debt as a share of income) with no compensating factors. Documented factors can reach 40/50 at the top tier, and the automated finding governs most files.

Conventional tends to win when:

• Your credit is strong and you can put 5% to 10% or more down.
• You plan to stay long enough that a permanent annual premium would add up.
• You want insurance you can ask to cancel as equity builds.

If you served in the military, compare VA too. Lendmire’s piece Should a First-Time Buyer Veteran Pick an FHA Loan Over VA? walks through that choice.

Key Terms Defined

Upfront premium: a one-time FHA insurance charge of 1.75% of the base loan, usually financed into the balance.

Annual premium: the monthly FHA insurance charge, set between 0.15% and 0.75% of the balance per year.

Base loan amount: the loan before the upfront premium is added.

LTV: the loan balance as a percentage of the home’s value.

Minimum required investment: the 3.5% of price or appraised value, whichever is lower, that you contribute from an approved source.

PMI: private mortgage insurance on conventional loans, which carries its own cancellation rights.

If you are buying a home and want to see whether an FHA loan fits your file, Lendmire can help you compare the options and what each one asks of the file.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2023-05

2. CFPB: Guidance on private mortgage insurance cancellation and termination

3. CRS: FHA-Insured Home Loans: An Overview

4. HUD: Single Family Mortgage Insurance Premiums