Are FHA interest rates lower than conventional rates?

FHA interest rates are often 0.25-0.5% lower than conventional rates for borrowers with credit scores below 680. However, for borrowers with excellent credit (740+), conventional rates are typically equal to or lower than FHA rates.

Why is my FHA rate lower but my payment higher?

Even with a lower rate, FHA loans have higher monthly payments due to mortgage insurance premiums (both upfront MIP of 1.75% and annual MIP of 0.55%). These insurance costs often exceed the savings from the lower rate.

Does my credit score affect FHA rates?

Yes, but less dramatically than conventional rates. FHA rates might vary 0.25-0.5% between a 580 and 800 score, while conventional rates can vary 1% or more across the same range.

Should I choose FHA for the lower rate?

Not necessarily. The lower rate is offset by higher mortgage insurance costs. Compare the total monthly payment (including insurance) rather than just the rate. Use our calculator to see the full picture.

FHA vs Conventional Interest Rates: Why FHA Isn't Always Cheaper

Quick Answer

FHA interest rates are often lower than conventional rates, especially for borrowers with credit scores below 680. However, the lower rate is misleading because FHA’s mandatory mortgage insurance premiums add 0.55% annually plus a 1.75% upfront fee. When you compare total monthly costs including insurance, conventional loans are often cheaper for borrowers with good credit.

Key Takeaways

FHA rates are typically 0.25-0.5% lower for credit scores below 680
Conventional rates are better for credit scores above 740
Rate alone is misleading — compare total cost including insurance
FHA insurance adds effective 0.55%+ to the real cost of the loan
Conventional PMI pricing rewards good credit; FHA MIP does not

Rate Comparison by Credit Score

Credit Score	FHA Rate	Conventional Rate	Difference
580-619	6.50%	7.50%+	FHA 1.0%+ lower
620-659	6.375%	7.00%	FHA 0.625% lower
660-699	6.25%	6.75%	FHA 0.5% lower
700-739	6.25%	6.375%	FHA 0.125% lower
740-850	6.125%	6.00%	Conventional 0.125% lower

True Cost: Rate vs Total Payment

For a $300,000 home with 5% down and a 700 credit score:

FHA Loan:

Rate: 6.25% → $1,785/month P&I
MIP: $132/month (0.55% annual on $289,500)
Total: $1,917/month

Conventional Loan:

Rate: 6.375% → $1,768/month P&I
PMI: $75/month (based on 700 credit, 95% LTV)
Total: $1,843/month

Result: Conventional is $74/month cheaper despite a higher rate!

Use our calculator to run your own comparison.

The Insurance Factor

The key insight is that mortgage insurance pricing works differently:

FHA MIP: Fixed at 0.55% regardless of credit score (everyone pays the same)
Conventional PMI: Risk-based pricing — good credit = lower PMI

This means conventional PMI is dramatically cheaper for borrowers with good credit, offsetting the slightly higher interest rate.

When FHA’s Lower Rate Wins

FHA’s lower rate actually saves money when:

Your credit score is below 660
The rate gap exceeds 0.5%
You plan to refinance within 5-7 years

See our total cost comparison for the full analysis, and compare insurance costs in our FHA MIP vs conventional PMI guide.