First factor you must think about is how long you plan to stay in the house. For each option, multiply the total monthly payment by the # of months, add the up-front costs, and then find out what your loan balance will be as of that time (a little harder to calculate, but most likely your loan officer can tell you, or better yet give you a table showing loan balance vs. life of loan assuming you don’t make extra principle payments). Knowing how long you’ll stay in a house can be tricky – for some it’s easy (you know you’ll need more space if you are planning to have kids, or to downsize if kids are leaving the nest, or maybe this is your dream house and you’ll be there for the life of the loan). But for must of us you need to just take a reasonable stab at it, perhaps by estimating what’s the minimum time you’ll be there and work from that even if it might be longer.

Second factor is when do you think you’ll be able to get enough equity to no longer have to pay PMI? If you can swing extra principle payments and get there faster, that might influence your decision. BUT… ask about if/when you can stop paying PMI for each option. I was told that for FHA you must continue to pay regardless of your equity position for the first 5 years. I looked around to try to confirm that just now and found only this on the FAQ for fha.com: The PMI cost “is borne by the homebuyer, but the insurance cost ends approximately five years later, or when the FHA mortgage balance is seventy-eight percent of the property value, whichever occurs last.”

Note the bit about “whichever occurs last” – so I think that confirms what I was told: minimum of 5 years regardless of equity position. That’s $17760 over 5 years that you are forced to pay unless rates are still low when you get to 20% equity and you can refi.