The Case for Making a VA Loan Down Payment
One of the attractive qualities of VA mortgages is that they do not require a down payment. That can shorten the path to home ownership for qualified veterans, but should you take that shorter path? There is a case to be made that making a VA loan down payment will leave you better off financially in the long run.
VA Backing Gives Lenders the Confidence to Accept No Down Payment
VA loans are not made directly by the Veterans Administration. They are issued by private lenders, but it is the backing of the federal government that gives lenders the confidence to make these loans with more generous loan terms, including having little or no down payment.
Trying to save for a down payment can be a significant barrier to home ownership for many would-be buyers. Even if they are able to steadily build up a down payment, the time it takes can cause them to miss out on a low interest rate opportunity. Also, even if they are able to accumulate some savings, draining the savings account for a down payment can leave them without a reserve against financial setbacks or the unexpected expenses that come with owning a house.
Understandably then, many VA loan borrowers choose not to make a down payment. However, before you choose that path, you should be aware of the benefits of making a VA loan down payment anyway.
Why You May Be Better Off with a VA Loan Down Payment
Here are three reasons to consider making an VA loan down payment, even though you don’t have to:
Lower VA loan funding fee
VA loans require a funding fee, which helps the VA guarantee these loans. The size of this funding fee depends on whether or not you make a down payment, and how large that down payment is. For example, regular military veterans taking out their first VA loan would pay a 2.15 percent funding fee if they made no down payment. This would drop to 1.5 percent if they made a down payment of at least five percent, and to 1.25 percent if they made a down payment of at least 10 percent. The combination of a lower percentage fee and applying that lower percentage to a smaller loan balance reduces this funding fee when you make a down payment. The funding fee on a $150,000 home would be $3,225 (2.15 percent of $150,000) with no down payment, but only $1,687.50 (1.25 percent of $135,000, which is the $150,000 home value minus 10 percent) with a 10 percent down payment. Remember, unlike a down payment, this funding fee does not contribute to the equity you own in your home, so in this example the difference in funding fees would be a potential $1,537.50 savings on your part. By the way, the difference in funding fees with and without a down payment is even greater for people who have already taken out a VA loan previously, so these veterans in particular should consider making a down payment.
More flexibility later on
Refinancing a mortgage can allow you to capture a lower interest rate, reduce your long-term interest expense by paying the loan off more quickly, or restructure your payment schedule to make your mortgage more affordable. The more equity you have in your home, the wider the variety of refinancing options you will have, and making a down payment starts you out with equity, and helps cushion you against fluctuations in the value of your home.
Less interest expense over the life of the loan
Making a down payment means borrowing less money, and this will result in you paying less interest over the full term of the loan. To see how much a down payment will save you in the long run, use a loan calculator to run the numbers both with and without a down payment, and see how much less the interest expense is with one.
Military veterans tend to understand making sacrifices. The sacrifices involved in saving up for a down payment on your VA loan can bear significant rewards in the long run.