Should veterans with funds available for a down payment, choose a VA home loan or a conventional loan with Private Mortgage Insurance?
Today (2/10/2009) a VA home loan is offered at 5.0% with a 1.25% fee (sometimes called a discount point). For a $400,000 loan, that translates to a $5,000 cost to obtain that interest rate. Today (2/10/2009), a conventional mortgage is offered at 5.0% with a 1% fee (sometimes called a discount point). For a $400,000 loan, that translates to a $4,000 cost to obtain that rate. The “cost of credit” then is $1,000 more expensive…TODAY…to obtain a VA home loan.
NB: Rates/terms change daily so tomorrow might have a different variance.
Conventional mortgages, with a down payment of less than 20% require private mortgage insurance to be carried by the borrower (this insures the lender against default). For a 10% downpayment, this would add a monthly premium of about $210.00. That extra cost feels like an extra .625% on the rate.
VA home loans don’t require private mortgage insurance. The VA insures the lender against default by charging a “funding fee“; they increase the loan size by the funding fee to collect it.
VA Funding Fee Schedule:
- For zero down VA loans, the VA charges 2.15% of the loan amount for first-time home buyers.
- If a veteran were to put 5% down, the funding fee drops to 1.5% of the loan amount.
- At 10% down payment, the VA funding fee drops to 1.25% of the loan amount.
Compared side-by-side, the VA loan charges a funding fee of $5,000 while the conventional loan charges $210/month in PMI. When we add back in the extra $1,000 it costs to obtain the commensurate rate (explained in paragraph two), the total extra costs to obtain a VA home loan, with no monthly private mortgage insurance, are $6,000. That $6,000 is recovered in 29 months. If we assume a minimum five year holding period for the property, the VA home loan is about $6,200 cheaper than the conventional mortgage option.
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