Reading the FHA loan numbers
FHA MIP usually runs for the life of the loan. Conventional PMI has two cancellation paths under the Homeowners Protection Act — borrower-requested at 80% actual balance, automatic termination on the scheduled 78% date — but FHA MIP usually follows neither. That means every month you carry the FHA loan, you're paying both the rate AND the annual MIP — a baked-in surcharge of 0.15-0.75% that wipes out part of your prepayment savings.
The strategy: aggressively prepay until you reach 20% equity, refinance into a conventional loan to drop the MIP, then evaluate whether further prepayment beats other uses of cash. The MIP-savings half of the math frequently dwarfs the interest-savings half on a typical FHA loan.
Closing costs to refinance ($6-12k) are real and should clear the break-even test before you trigger. Standard rule: if dropping MIP saves $1,500-3,500/year and you'll keep the home for 3+ more years, the refinance pays for itself.
Worked example: $280k FHA loan at 6.75% over 30 years
FHA loan with 3.5% down → upfront MIP of 1.75% = $4,900 financed into the loan. True starting principal: $284,900. Monthly P&I at 6.75% over 360 months: ~$1,847. Annual MIP at 0.55% on the average outstanding balance: ~$130/month early on, declining as principal pays down. Total all-in monthly payment in year 1: ~$1,977.
No-extras 30-year baseline: total interest ~$380,000 PLUS roughly $32,000 in lifetime annual MIP (assuming MIP runs for the life of the loan). Combined cost of carry: ~$412,000.
Add $100/month from month one and the loan pays off about 3 years 5 months early (319 months instead of 360). Total interest drops to roughly $329,000 and lifetime MIP drops to about $25,000 — combined savings: about $58,000. Better path: prepay aggressively to 20% equity (about year 7-8 on this loan), then refinance into conventional to drop MIP entirely. The MIP-elimination savings ($1,500-3,500/year) often dwarf the interest-savings figure.
FHA loan reality checks before you prepay
MIP doesn't follow conventional PMI's cancellation paths
On most FHA loans originated after June 2013, the Mortgage Insurance Premium runs for the LIFE of the loan, regardless of how much equity you build. Conventional PMI has two cancellation paths under the Homeowners Protection Act — borrower-requested at 80% actual balance, automatic termination on the scheduled 78% date — but FHA MIP usually doesn't follow that LTV-based path. The only way out: refinance into a conventional loan once you have 20%+ equity.
There are TWO MIPs — upfront and annual
Upfront MIP: 1.75% of loan amount, paid at closing (usually financed into the loan). Annual MIP: 0.15-0.75% of the loan, paid monthly as part of your mortgage payment. Both inflate your true cost. The annual MIP especially is what makes FHA more expensive than conventional once you cross 20% equity.
Refinancing out of FHA at 20% equity is the play
Once you reach 20% equity (78-80% LTV), refinance into a conventional loan to drop the MIP. Even if your rate goes up slightly, you save 0.15-0.75% in MIP — usually a net win. The math: closing costs ($6-12k) vs. MIP savings (typically $1,500-3,500/year on a $300k loan).
FHA Streamline Refi if you stay in FHA
If you decide to refinance but want to stay in FHA (rate dropped, you don't have 20% equity yet), the FHA Streamline program requires no appraisal, no income verification, no credit check beyond a basic confirmation. Closing costs are minimal, but you keep the MIP.
Aggressive prepayment makes the MIP exit faster
Since MIP runs forever on most FHA loans, the fastest way to escape it is to either fully pay off the loan or refinance into conventional. Aggressive principal payments accelerate the LTV crossover, getting you to refinance-eligibility faster. This makes prepayment math more attractive for FHA than conventional.
What most FHA loan payoff calculators don't tell you
Three things competitors typically miss. First: lifetime MIP. On most FHA loans originated after June 2013, the annual MIP runs for the full term of the loan. Conventional PMI has two cancellation paths under the Homeowners Protection Act — borrower-requested at 80% actual balance, automatic termination on the scheduled 78% date — but FHA MIP usually follows neither, regardless of how much equity you build. Most calculators on the open web treat MIP as a temporary surcharge or ignore it entirely — both mistakes inflate the apparent prepayment savings on an FHA loan.
Second: the prepay-then-refi strategy is the actual optimal path. Pure prepayment math says 'pay extra to save interest,' but on FHA the bigger lever is escaping MIP via refinance into conventional once you cross 20% equity. Aggressive prepayment isn't really about saving the marginal interest — it's about reaching the refi-eligibility threshold faster so you can drop the 0.55% MIP surcharge on the entire remaining balance.
Third: closing costs to refinance ($6,000-$12,000) need to clear the break-even test before you trigger. The break-even rule: if dropping MIP saves $1,500-3,500/year and you'll keep the home for 3+ more years post-refi, the refinance pays for itself. If you might move sooner, prepaying without refinancing is the better move — the MIP surcharge keeps running, but you avoid burning closing costs you can't recover.
Frequently asked questions
Does FHA mortgage insurance go away if I pay down to 80% LTV?
For most FHA loans (originated after June 2013), no — MIP runs for the life of the loan. The only way to drop it is to refinance into a conventional loan. Loans originated before June 2013 follow different rules; check your closing documents. The exception: if your loan was for less than 90% LTV originally, MIP runs for 11 years instead of life.
Should I refinance from FHA to conventional?
Yes, usually, once you have 20% equity. The MIP savings (~$1,500-3,500/year on a typical $300k loan) usually outweigh closing costs within 3-5 years. Run the math: (closing costs) ÷ (annual MIP savings + any rate-savings from refi) = years to break even. If you'll stay longer than that, refi wins.
Is there a prepayment penalty on FHA loans?
No. Federal law prohibits prepayment penalties on all FHA loans. You can pay off any amount, anytime, with no penalty.
Are extra payments applied to principal automatically?
Usually, but confirm with your servicer. By default, FHA servicers should apply extras to principal. Some servicers default to 'next month's payment' instead, which doesn't help. Tell them in writing — most allow a standing instruction online — that all extras go to current principal.
FHA loan basics — when this is the right product
FHA loans are designed for buyers who don't qualify for conventional financing — typically because of lower credit scores (down to 580 with 3.5% down) or limited cash for a down payment. The trade-off is the lifetime MIP. Most FHA borrowers should plan on refinancing into a conventional loan once they have 20% equity.
Read the full FHA loan guide → eligibility, MIP details, refi strategy
Where this FHA loan calculator's math stops being honest
The math is exact for fixed-rate amortizing loans with monthly payments, but it doesn't capture every situation. Cases where the output above will mislead you:
- FHA MIP is not in the model. Add it as an effective rate increase: a 7.0% APR FHA loan with 0.55% annual MIP behaves more like a 7.55% loan in true cost terms.
- Loans originated before June 2013 follow different MIP-cancellation rules — check your closing docs.
- The FHA Streamline Refi program has its own rules (no appraisal, no income re-verification) the calculator can't model.
- FHA loan limits vary by county and reset annually; the calculator doesn't enforce them.
Sources and references
- HUD — FHA single-family mortgage insurance premium — official MIP rates by loan term, LTV, and origination date
- FHA single-family loan limits — current county-by-county FHA loan limits
- CFPB on FHA loans and prepayment — regulatory guidance on FHA-loan consumer protections
- PayoffMath FHA loan guide — deeper write-up on the prepay-then-refi strategy
Related guides
- FHA loan guide — MIP and the refinance exit
- Refinance vs. prepay — which saves more?
- Refinance vs. purchase — which move wins?
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Calculator and notes maintained by James L. Wu. The payoff math is straightforward; the FHA-specific wrinkle is mortgage insurance. The annual MIP usually runs for the full life of the loan and only comes off by refinancing into a conventional mortgage. Not financial advice — confirm specifics against your loan documents. See methodology for the formulas + assumptions and the editorial policy for sourcing. Last refreshed April 2026.