The VA loan program removes one of the biggest obstacles to homeownership: the down payment. By allowing eligible home buyers to finance 100% of the purchase price, this program eliminates the need for a down payment. This greatly reduces the home buyer’s out-of-pocket expense.
But there are other ways to save money when using a VA loan to buy a house. Below, you will find a variety of strategies that could help you save money in both the short and long term.
8 Ways to Save Money With a VA Loan
There are different ways to save money when using a VA-guaranteed mortgage loan. Some of these money-saving opportunities occur on the front end of the process, when you first take out the loan to buy a house. Other strategies can help you save money over time, during your years of homeownership.
For instance, making a down payment requires more money out of pocket, up front, but it would also reduce your monthly payments and total interest costs.
Not all of the strategies listed below will apply to you. Our goal with this article is to show you as many money-saving strategies as possible. This will help you determine which ones might work for you, given your current financial situation and long-term goals.
1. Make a down payment, even if it’s not required.
VA loans allow borrowers to avoid making a down payment. But for those who can afford to put some money down, it could significantly reduce interest costs over the life of the loan. Even a small down payment can make a significant difference when it comes to long-term savings.
For example, a $400,000 VA loan with a 30-year term and a 7% interest rate will have a monthly payment of around $2,322. But if the borrower made a 5% down payment of $20,000, the monthly payment would drop to around $2,228, saving them $94 per month.
You don’t have to make a down payment when using a VA loan. That’s one of the major benefits this program offers. But you should at least consider how a down payment might benefit you over the long term, in terms of saving money.
2. Improve your credit score to get a lower interest rate.
Borrowers with higher credit scores tend to qualify for lower mortgage rates. This is true for VA and conventional loans alike. When you secure a lower interest rate, you are reducing your monthly payments as well as your long-term interest costs. So this is another way to save money over the long term when using a VA loan to buy a house.
What’s the best way to boost your credit score?
First of all, be sure to pay all of your bills on time going forward. Your “payment history” influences your credit score more than any other individual factor. You could also boost your score by reducing your credit card usage and balances.
3. Get a VA funding fee exemption, if applicable.
Most borrowers who use the VA loan program have to pay a funding fee. This one-time fee can be paid up front or financed into the loan. Funding fees help keep the VA loan program operating, while reducing the burden on taxpayers.
But certain borrowers are exempt from the VA loan funding fee, which in turn could save them money over time. Veterans with a service-connected disability, Purple Heart recipients, and other specific groups are exempt from having to pay a funding fee.
4. Consider using mortgage discount points.
Mortgage discount points (also known as prepaid interest) could help you save money on your VA loan over the long term. With this strategy, you are basically paying a little more money up front in exchange for a lower rate.
Securing a lower mortgage rate could save you a significant amount of money over time. Each discount point is equal to 1% of the loan amount and could lower your interest rate by 0.25%.
The amount of money you save on your VA loan will depend on the interest rate you get and the length of time you stay in your home. If you plan to stay in your home for a long time, paying for points can save you a significant amount of money on interest.
5. Choose a shorter loan term.
A shorter loan term will mean higher monthly payments, but you’ll also pay less interest over the life of the loan.
For example, a $400,000 VA loan with a 30-year term and a 5% interest rate could have a monthly payment of roughly $2,126. But by using a 15-year term instead, the monthly payment could drop to around $3,225. A borrower in this situation could save about $200,000 in total interest costs over the life of the loan.
6. Consider using an ARM loan.
If you’re going to use a VA loan to buy a house, but you only plan to stay in the home for 3 to 7 years, you might also consider using an adjustable-rate mortgage (ARM).
Generally speaking, ARM loans offer a lower mortgage rate during the first few years when compared to the more popular 30-year fixed-rate home loan. Just know that the interest rate on an ARM loan could increase after those first few years.
7. Negotiate closing costs.
Closing costs can add up quickly, but many of them are negotiable. VA loan borrowers can negotiate with sellers to cover part or all of the closing costs. This can significantly reduce the upfront expenses associated with buying a home.
But check with your real estate agent before requesting a closing cost contribution from the seller. In a hot real estate market, such a request could work against you.
8. Keep an eye on interest rates, going forward.
Mortgage rates change constantly. And while they’ve risen over the past couple of years, some analysts expect rates to ease a bit over the coming months. Declining mortgage rates give homeowners the opportunity to save money by refinancing.
When you refinance, you replace your existing mortgage loan with a new one, ideally securing a lower rate in the process. Homeowners who have a VA loan can use the “streamline” refinancing program to reduce paperwork hassles and skip the home appraisal.