Veterans of the military, Reserves, and National Guard may be eligible for the VA home loan benefit. This loan program offers financing for veterans that served 90 days during wartime or 181 days during peacetime in the regular military. It also provides benefits for those in the National Guard or Reserves for at least six years.
One of the largest benefits of this program is that you don’t need a down payment. You can borrow 100% of the home’s purchase price as long as the appraised value equals the purchase price (or higher). This means you only need cash to cover your closing costs and there are even ways around that.
The question you may want to ask yourself is ‘should you make a down payment?’
Build Equity Faster
When you don’t put any money down on a VA loan, you borrow 100% of the home’s purchase price. Because a large majority of your mortgage payments for the first few years will cover the large interest costs, it can take you a long time to build equity in your home. If you want to turn around and sell it in a few years, you may walk away with very little cash in your pocket because of the little equity you had in the home
If you make a down payment, you automatically have equity in the home. Your equity is equal to the down payment that you make. Even just 5% or 10% can make a big difference. Just knowing that you have a little capital that you can access if you need is a great feeling. Many people use this as their ‘emergency fund.’ Since VA cash-out refinance loans allow 100% LTVs, you can tap into the cash should you need it down the road.
Lower Your Funding Fee
The VA charges a funding fee on every loan written in their name. The only exception to this rule is veterans that became disabled as a result of their time in service or for surviving widows of veterans that lost their lives during the service. The veterans/spouses that meet these exceptions won’t pay a funding fee, but everyone else does.
The funding fee you pay on a typical purchase loan with no down payment is 2.3% of the loan amount. This is for those in the regular military. The funding fee goes up to 2.4% for those in the Reserves or National Guard.
If you make a down payment, though, you decrease the funding fee that you must pay. For example:
- A 5% down payment brings your funding fee down to 1.65% of the loan amount
- A 10% or greater down payment brings your funding fee down to 1.4% of the loan amount
As you can see, that’s 0.65% to 0.9% savings. When you are talking about hundreds of thousands of dollars, you could realize some large savings.
You’ll Pay Less Each Month
While you might balk at the idea of putting a down payment down now because you’ll empty out your bank account, it can help you save money each month. Many people do what they can to keep their monthly payments down as it decreases the stress you experience with higher payments.
We’ll look at the difference on a $200,000 loan with no down payment and a 5% down payment to see how much you can save. We’ll use a 4.5% interest rate for both examples:
- With no down payment, your monthly payment with just principal and interest would be $1,013
- With a 5% down payment, your monthly payment with just principal and interest would be $963
While it’s a $50 monthly savings, it’s a $600 annual savings and $18,000 savings over the life of the loan. That far surpasses the money you would put down if you made a 5% down payment of $10,000.
Making a down payment on a VA loan can be a good idea if you can swing it. If you can’t, don’t worry about it because it’s not required. You can borrow 100% of the home’s price, just try to make extra principal payments along the way to help yourself build equity faster.