We have an FHA loan and that's not how it works at all; we paid a certain percentage up front, and if we get re-appraised or pay 20% equity within the 5 years the MI goes away and we get a prorated portion of the up-front MI back (it's not private, as it's govt. subsidized). Also, since it's not private the cost is only $75/month on our $160K loan - PMI was running $150 - $200.
Also, one nice perk about FHA loans is that they are assumable, meaning that when you go to sell your home years from now, the buyer can qualify for your mortgage just like you did and just take over the payments at the current interest rate and cover the rest in cash/down payment. Given where rates are currently, I'd bet good money that they will be appreciably higher in 5-10 yrs.
For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years.