Understanding Down Payments and Private Mortgage Insurance as a First-Time Buyer

How much should you put down on your first home—and what’s the deal with private mortgage insurance (PMI)?

If you’re a first-time homebuyer, you’ve probably heard a lot of conflicting advice about down payments. Some people say you need 20%. Others claim you can buy with as little as 3%. The truth is, there’s no single “right” number—just the one that works best for you and your financial situation.

Let’s break down how down payments work, when PMI comes into play, and how to make smart choices as you buy your first home.

What Is a Down Payment?

A down payment is the amount of money you pay upfront toward the purchase price of your home. The rest is financed through your mortgage.

Here’s a quick look at common minimum down payments by loan type:

🏡 Conventional Loans: As low as 3–5%
🏠 FHA Loans: 3.5%
🎖️ VA Loans: 0% (for qualified veterans and service members)
🌾 USDA Loans: 0% (for homes in eligible rural/suburban areas)

While 20% down is ideal for avoiding extra fees, many first-time buyers purchase successfully with less—and still get competitive loan terms.

What Is Private Mortgage Insurance (PMI)?

PMI is insurance that protects your lender if you stop making payments. It’s typically required for conventional loans when you put down less than 20%.

Here’s what to know:

• PMI is added to your monthly mortgage payment.

• The cost usually ranges from 0.3% to 1.5% of your loan amount annually, depending on your credit score and down payment size.

• It doesn’t protect you as the buyer—but it makes it possible to purchase a home sooner without saving a full 20%.

💡 Good news: PMI isn’t forever. Once you reach 20% equity (either through payments or rising home value), you can request to remove it.

FHA Mortgage Insurance (MIP)

If you use an FHA loan, you’ll pay a similar fee called Mortgage Insurance Premium (MIP).

FHA loans require both:

• An upfront premium (usually rolled into your loan), and

• An annual premium paid monthly.

Unlike PMI, MIP typically lasts for the life of the loan—unless you refinance into a conventional loan later.

How to Decide What’s Right for You

Choosing your down payment amount depends on your goals, budget, and timeline.

Here’s how to weigh your options:
💰 Lower Down Payment: Keep more cash for savings or home updates, but pay PMI for a few years.
🏦 Higher Down Payment: Lower monthly payments and no PMI, but more upfront cost.

Many first-time buyers start with a smaller down payment, then refinance later once they’ve built equity.

Tips for First-Time Buyers

1. Get pre-approved early. Know exactly how much you can afford and what your down payment options are.

2. Ask about assistance programs. New Jersey offers down payment grants and first-time buyer programs that can help you qualify with less cash upfront.

3. Compare loan types. Your lender can show you how different down payment amounts affect your monthly payment and long-term costs.

4. Plan ahead for PMI removal. Mark your calendar for when you’ll hit 20% equity so you can request to drop it.

Final Takeaway

Understanding your down payment and PMI options is key to making confident financial decisions as a first-time buyer. You don’t need 20% to start your homeownership journey—just the right plan, lender, and guidance.

With the right strategy, you can buy sooner, build equity faster, and move toward owning your home free and clear.

Ready to Start Your Home-Buying Journey?

If you’re planning to buy your first home in New Jersey, I can help connect you with trusted lenders and guide you through every step—from financing to closing.

📞 Call Scott Selleck of The Selleck Group, KW City Views Realty at 201-970-3960 or email [email protected] to start your homeownership journey with confidence.