Why Should You Make A Down Payment For Your VA Loan When It Isn’t Required?
Just because you don’t have to make a down payment when applying for a VA loan doesn’t mean that you shouldn’t. There are times when making a down payment on these loans makes financial sense.
Lowers The VA Funding Fee
When you take out a VA loan, you'll have to pay a one-time fee known as the VA funding fee. This fee varies, largely depending on the size of your down payment. The larger your down payment, the lower your VA funding fee.
If you are taking out a VA loan for the first time, and your down payment is less than 5%, your VA funding fee will be 2.15% of your home's final purchase price. That comes out to $4,300 for a home costing $200,000.
If your down payment is 5% or more, your VA funding fee will be 1.5% of your home's purchase price. For that same home costing $200,000, then, your funding fee will be $3,000. If you come up with a down payment of 10% or more, your VA funding fee will be 1.25% of your home's final purchase price, or $2,500 on a home costing $200,000.
Cuts The Cost Of Monthly Payments
Coming up with a down payment can also lower your monthly mortgage payments. First, you’ll be borrowing less money. If you buy a home for $200,000 and you put down $10,000, you’ll only be borrowing $190,000, which will result in slightly smaller mortgage payments than if you were borrowing $200,000.
You’ll usually qualify for a lower interest rate, too, if you come up with at least some down payment. A lower interest rate means lower monthly payments.
Builds Equity
A down payment can also help you build equity in your home. Equity is the difference between what you owe on your mortgage and what your home is currently worth. If your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 equity.
Coming up with a down payment immediately gives you equity. If you buy a home for $220,000 and come up with a down payment of $10,000, you now have $10,000 worth of equity before making any mortgage payment.
Equity is important. You can borrow against it to take out loans that you can use to pay for everything from home repairs to paying off credit card debt or paying for your children’s college tuition. The amount of equity you have when you sell your home also determines how much money you’ll walk away after closing the sale.
Reduces Principal Balance And Loan Costs
Making a down payment also reduces your loan’s principal balance, the amount you owe. If you buy a home for $200,000 and don’t make a down payment, your starting principal balance is $200,000. If you come up with a down payment of $5,000, your starting principal balance is a lower $195,000.
If your principal balance is lower, your loan closing costs can be lower, too. Closing costs are the fees that third-party providers – such as your lender, title insurer and real estate attorney – charge for the work they do in closing your loan.
Many of these charges are based on a percentage of your loan’s principal balance. The lower your principal balance, then, the lower your closing costs might be.
Increases Approval Chance
Coming up with a down payment could increase your chances of qualifying for a mortgage. Lenders consider you less likely to stop making your mortgage payments if you have already sunk some money in your home through a down payment. However, it’s important to remember that not making a down payment won’t scuttle your chances of qualifying for a VA loan. Most borrowers taking out these loans don’t make any down payment.
