If you are a veteran of the military, you have the good fortune of being able to finance 100% of a home’s purchase price. You do not have to put any money down on the home. The only cash you’ll have to come up with is for the closing costs unless you roll them into your loan.
However, there is a time when it makes sense to make a down payment on a VA loan. It can save you quite a bit of money in the long run.
Save on the Funding Fee With a Down Payment
In order to qualify for a VA loan, you do not need to put any money down. Let’s say you can purchase a home for $150,000. You can apply for a $150,000 VA loan. As long as the home appraises for the $150,000, you are in good shape.
But, there is a benefit of paying at least 5% of the purchase price when buying a home. You’ll pay a lower funding fee. Every VA loan has a funding fee. The VA uses this money to continue guaranteeing loans for veterans. They use what they call the ‘reserves’ to pay lenders back when a borrower defaults.
If you don’t put any money down on a home, you pay a 2.15% funding fee. But, if you make at least a 5% down payment, your funding fee drops to 1.5%. Let’s look at how this makes a difference on a $150,000 loan:
- No down payment = $3,225 funding fee
- 5% down payment = $2,250 funding fee
In this case, you’d save $975 right off the bat.
Save on Interest With a Down Payment
It might not sound like a big saving to save just 0.65% on your funding fee, but that’s just the tip of the iceberg. You also save significantly on interest. The less you borrow, the less interest you pay.
Using the 5% down payment example on a $150,000 loan at 4.5% interest, look at the difference below
- No down payment = Monthly payment $760 and total interest paid $273,000
- 5% down payment = Monthly payment $722 and total interest paid $259,900
This is where you’ll see the largest savings. Your $7,500 down payment upfront saves you a total of $14,075 over the term of the loan. This is if you only make the minimum payment each month. If you pay extra, your savings increases even more.
A Down Payment Isn’t Necessary But Can Help
As you can see, you don’t have to put money down on a VA loan, but there are benefits. If you have the cash available, you may want to do the calculations to see how much you stand to save. However, you also have to take in one more vital piece of information. How long do you plan to stay in the home?
The savings calculated above is based on you living in the home for the term of the loan and not refinancing. It’s hard to predict what you’ll do over the next 30 years, so keep that in mind. If, however, you know you’ll likely move in the next few years, you may want to save the money and pay the slightly higher interest charges since it’s a temporary thing.
Luckily, you don’t need to pay any money upfront if you don’t have it. You can gain VA approval as long as you can afford the payments. Just keep in mind that it will take many years before you have sufficient equity in the home.
Buying a home is a large investment that requires plenty of forethought. Think about how you plan to live your future and how it will affect your finances. Whether you put money down on the home or you take the 100% financing, the VA loan is a lucrative financing tool to help veterans become homeowners.