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Mortgages from the Department of Veterans Affairs are known for not requiring a down payment. So why in the world would you make one? Here are four good reasons to put some money down on a VA loan.
1. You’ll pay a lower VA funding fee
First off, VA mortgages require a funding fee, whether you make a down payment or not.
However, the amount that you put down on your home directly corresponds to the fee rate you’ll be required to pay. For example, someone putting down less than 5% will pay a fee rate of 2.3% of the loan balance for their first VA loan, whereas they’d pay just 1.4% if they put down 10% or more. The highest fee rates are for borrowers who have gotten a VA loan before and are putting down less than 5% — this group will have to pay a funding fee of 3.6%.
VA funding fees on a $250,000 home purchase
2. You'll have a lower monthly payment and pay less in interest
With a down payment, your monthly payment and lifetime costs are lower. Even just 5% of the cost of the home can make a difference since this amount would otherwise accrue interest over the life of the loan. When talking about 30-year terms, this can add up to significant savings. If you can afford to take on larger monthly payments, having a down payment can also enable you to pay off the loan faster and build equity early in your tenure as a homeowner.
» MORE: Calculate your VA loan payments
3. You can better navigate a competitive market
A competitive housing market can present challenges to a would-be buyer with no down payment. Having a down payment can help solidify your image as a serious buyer by demonstrating that you’re willing to make an investment.
Additionally, a portion of your down payment might be allocated to earnest money, cash you put in escrow to help seal the deal with a seller. Since the seller is assuming some personal risk by taking the listing off the market while the sale closes, earnest money can help assuage any concerns that the deal will fall through.
4. You’ll have instant equity in your home
Without a down payment, you’ll likely have no equity in your home right at the start. If property values sag, you’ll be “upside down.” That’s when the market value of a home is less than what you owe. In that case, you can be in a real bind if you need to move and can’t make enough on the sale of your existing house to buy another.
Having value built into your home gives you some financial options, as well — for instance, a home equity line of credit or home equity loan. Being able to tap your home’s equity can be a real budget-saver when major home repairs or upgrades are needed.
You may not have a choice
In some situations, you may have no choice but to make a down payment:
If the home appraises for less than the purchase price, you’ll have to put enough down to make up the difference
If the home you want to buy costs more than the county loan limit approved for VA loans, you’ll have to put enough down to make up some of the difference.
In either case, you’ll have to cover the gap or back out of the deal.