Conventional loan points reduce your rate AND your private mortgage insurance (PMI) drops off automatically at 80% loan-to-value. FHA loan points reduce your rate, but mortgage insurance premium (MIP) stays for the life of the loan in most cases. Conventional often works out better long-term.
Conventional Points
On a conventional loan, one point costs 1% of the loan amount and typically reduces your rate by about 0.25%. If you put less than 20% down, you pay PMI. Buying the rate down lowers your payment in two ways: a lower rate means a lower principal and interest payment, and a lower starting rate helps you reach 80% LTV faster through amortization so PMI drops off sooner.
FHA Points
On an FHA loan, points also cost 1% of the loan and reduce your rate by roughly 0.25%. However, the MIP on FHA loans with a down payment under 10% stays for the entire loan term. Even with a lower rate, you still pay that MIP. For FHA loans with 10% or more down, MIP drops off after 11 years, but that is still longer than conventional PMI removal at 80% LTV.
Direct Comparison
On a $300K loan: conventional at 7% with one point (cost $3,000) drops to 6.75%. PMI of roughly $125/month drops off at 80% LTV in about 5-6 years. FHA at 7% with one point drops to 6.75% but MIP of roughly $200/month stays for the loan life unless you put 10%+ down. Over 10 years, the conventional route saves thousands in mortgage insurance alone.
Long-Term Cost
The deciding factor is how long you keep the loan. If you plan to stay 5+ years, conventional with points almost always beats FHA with points because of the PMI vs MIP difference. If your credit score is below 620, you may not qualify for conventional, making FHA the only option. In that case, points still help, but the savings are less dramatic.
Total Cost Analysis
Run the total cost including loan payments plus mortgage insurance over your expected time in the home. Conventional with points: lower payment + PMI that ends. FHA with points: lower payment + MIP that never ends. The math almost always favors conventional when you qualify for both loan types and plan to stay more than a few years.