Many clients have asked, “Should I use my VA Loan benefit to buy my home, or would I be better off going with conventional financing?”
The answer to this question will come down to a couple different factors such as: interest rate, how much down-payment you want to contribute, if you are exempt from the funding fee and how long you plan to have the loan.
Typically, you will see lower interest rates with a government-backed loan – like the VA – than you will with a conventional loan. The is an important factor to consider as interest rate will have a significant impact on how much interest you re-pay over the term of the loan.
Another factor to keep in mind is mortgage insurance. Conventional loans will require you to pay monthly mortgage insurance unless you are putting down 20% of the purchase price – in which case the mortgage insurance is not required. Mortgage insurance for conventional loans will range from .26% to as high as 1.36% of the purchase price as a yearly percent. This can add a significant amount to your monthly payment. The VA Loan does not require mortgage insurance, even if you are doing 100% financing.
One of the last major differences is that the Veterans Administration charges a funding fee on each VA Loan – unless the veteran is exempt from this fee. The fee will typically range from 1.5% to 3.3% depending on down payment and prior use. Most veterans elect to have this fee rolled into their loan. Depending on how long you plan to be in the home, you will want to weigh the savings of not paying mortgage insurance against the cost of the VA funding fee to see which option is better for you. In the case that the veteran is exempt from the funding fee – regardless of how much money they are putting down – using their VA benefit will typically save them more money than conventional financing.
The benefits to veterans of lower interest rate, no mortgage insurance and 100% options; makes the VA loan a great benefit for our service-men and women.
Veteran Loan Site
For more details on funding fee amounts, visit the VA website