One of the main advantages of the VA loan is that borrowers are not required to make a down payment. If you have money, however, saving money has major benefits.
Under the Department of Veterans Affairs benefits program, borrowers eligible for VA-guaranteed mortgages – which include most active-duty military and veterans, as well as surviving military spouses – are eligible for possibility of buying a house with $ 0 down payment. This allows the military to invest in a home sooner or to use their savings for other purposes.
VA loans do not require a down payment because the government guarantees the loan, guaranteeing that the lender will recover between 25% and 50% of the amount borrowed in the event of default. (This is also why USDA loans don’t require down payments and FHA loans only require small ones.)
While it’s tempting not to spend a large amount of money up front, saving money can lower your costs in the long run.
âI think the biggest benefit is saving money in the long run,â says Lacey Langford, a certified financial advisor who works with members of the military.
The advantages of paying a deposit
Reduce your monthly payment
If you put down a down payment, your monthly mortgage payments on the same price of the house will be lower because you are borrowing a smaller amount. Over the life of a loan, this can translate into thousands of dollars in savings. The higher your down payment, the less you will pay each month.
For example, if you have a fixed rate mortgage of $ 200,000 over 30 years with no down payment and an interest rate of 3%, your monthly payment will be $ 842.
On the other hand, if you put down 5% on the same loan at the same interest rate, your monthly payment will increase to $ 800.
Reduce your total interest payments
By putting money on a house, you will fund a smaller amount of money. The lower your loan balance and the lower the balance, the less interest you will pay over the life of the loan. A larger down payment could also help you qualify for a lower interest rate, which can also lead to savings in the long run, Langford notes.
For example, a borrower who buys a $ 200,000 house at 3% interest rate with no down payment will pay $ 103,554 in total interest on a 30-year loan. If they only put 5% down, they would pay $ 98,376 in interest.
Reduce your VA financing costs
By making a down payment, you will also reduce the amount you will pay for the cost of financing the VA. These upfront fees are used by the VA to fund the mortgage program.
- If you’re a first-time buyer and your down payment is less than 5%, you’ll pay a finance charge of 2.3% of the loan amount. On a $ 200,000 house, this comes down to $ 4,600 at closing.
- If you are using the VA Loan Advantage for the second time and put less than 5% down payment, the finance charge will be 3.6%.
- With a down payment of 5% or more, the finance charge goes down to 1.65% ($ 3,300 in the example above) and if you pay 10% or more, the charge goes down to 1.4% (2 $ 800), whether or not you’ve used the benefit before.
Build Home Equity Immediately
In addition to savings, a down payment means you immediately have equity in your home. If your home appreciates, your equity will increase and you will owe a smaller portion of your home’s value. If it is losing value, you are less likely to find yourself underwater (due to more than your home’s value).
Building up equity can also provide a financial cushion, allowing you to take out a home equity loan or line of credit should you face unforeseen repairs, medical bills, or other expenses.
How to determine whether to make a deposit
How much could you put in if you had to?
If you have the money, it’s better if you deposit something. It also doesn’t have to be the idealized 20% drop. A payment as small as 5% has a number of advantages in the short and long term.
With non-VA loans, paying a 20% down payment eliminates the need to pay for private mortgage insurance, which protects the lender. With a VA loan, however, there is no PMI whether or not you put in the money.
Keep in mind that the no-down benefit also depends on the appraised value of the home – the sale price cannot be greater than the appraised value. Otherwise, you will have to cover the difference.
How would a down payment influence your monthly payments?
Use a mortgage calculator to compare monthly payments with and without a down payment. What would happen if you deposited a small amount? How about going down to 20%? Once you have sample payments, see how each fits into your monthly budget.
A useful rule of thumb is the 28/36 rule, which says that –
- No more than 28% of your gross monthly income should be spent on housing costs, including mortgage payments, insurance, and homeowners association fees.
- No more than 36% of your income should be spent on paying off all of your debt, including your mortgages, other loans, and credit cards.
For example, if you earn $ 4,000 per month, you can spend up to $ 1,200 on housing and up to $ 1,440 on all debt.
Do you have an emergency fund?
You don’t want to put all your savings in a down payment if it leaves you without enough money for an emergency. Ideally, homeowners should have enough cash to cover six months to a year of expenses in the event of job loss or unscheduled repairs.
Also consider that you may have costs associated with moving in and furnishing a new home. When determining how much of a down payment to pay, make sure you have some leeway for up-front household expenses. âYou don’t want to be poor,â Langford said.
Does a down payment match your other financial goals?
Determining whether you can afford to save money will depend on your budget and financial goals, Langford says.
Before applying for a VA loan, take a close look at your finances and make the decision that will best meet your needs. âYou have to look at the long term plan for yourself and for your family, and then really write down the pros and cons,â she says.
Long-term goals may include saving for retirement or building a college fund for your children. If you need money for these purposes soon, it may be a good idea to save the money you have. On the flip side, if you have the time and can put down a down payment, you can use the money saved from lower monthly payments and spend it on reaching your goal.
If your top priority is buying a home and you can afford the monthly payments and house maintenance but don’t have enough for a down payment, then VA’s no down payment feature can be a great one. opportunity.
More money :
What is a VA loan?
7 VA loan tips for veterans, military, and military spouses
6 tips for buying military homes while on active duty abroad