Strategies for Reducing the Monthly Payments on a VA Loan

Marcus Marion, CMA™ 2 months ago 0 8

In a related article, we talked about some of the ways you could secure a lower mortgage rate on a VA loan. Today, we’ll explore some strategies for lowering your monthly payments when using a VA loan to buy a house.

1. Buying a less expensive home.

This might seem like an obvious strategy for lowering your monthly payments. But we’re going to leave no stone unturned in this guide, so we have to talk about home prices.

With a VA loan, the size of your monthly payments will largely depend on the amount of money you borrow. This is referred to as the “principal” amount. Your interest rate and homeowners insurance can also determine the size of your monthly payments, but to a lesser extent.

If minimizing the monthly payments on a VA loan is one of your top priorities, you should carefully consider the price range when shopping for a home.

This is one of the best ways to limit the size of your payments, because you have full control over it. You can decide how much you want to spend on a house and, by extension, how much you need to borrow from the lender.

To illustrate this point, let’s compare the monthly payments for two mortgage loans at different amounts. In both cases, we will use a 30-year fixed mortgage with a 6% interest rate and similar property taxes.

Here’s how the monthly housing costs would stack up:

  • $400,000 loan: Monthly payment approximately $2,398
  • $300,000 loan: Monthly payment approximately $1,799

With all other things being equal, the monthly payments on a $400,000 VA loan would be about $599 higher than the payments at the $300,000 threshold.

2. Extending the loan term.

You can also lower your monthly payments on a VA loan simply by choosing the longest term available. In this context, the “term” refers to the length of time a borrower has to repay the loan in full.

By extending the term of your loan (such as going from a 15-year to a 30-year mortgage), you can significantly decrease the size of your monthly payments. Granted, this might result in paying more interest over time, depending on how long you keep the loan. But it can also provide immediate relief in the form of lower monthly payments.

3. Putting more money down.

“A down payment on a VA loan? Doesn’t that defeat the purpose of this program?”

While it’s true that the VA loan program allows borrowers to buy a home with no money down, there are scenarios where a down payment might make sense. This is especially true for home buyers who prioritize having the smallest possible monthly payment.

If you can afford to put some money down when using a VA loan to buy a house, you might be able to secure a lower mortgage rate while also reducing the size of your monthly payments.

The more money you put down up front, the less you have to borrow from the lender. Combine this with some of the other strategies in this guide, and you could significantly lower your monthly payment amount.

4. Avoiding mortgage insurance.

Home buyers who take out a mortgage loan that accounts for more than 80% of the home’s value typically have to pay private mortgage insurance. But the VA loan program allows borrowers to avoid this additional cost, even if they put zero money down.

Mortgage insurance is typically rolled into the monthly payments. So if you can avoid this kind of insurance, you’ll also be reducing your monthly housing costs. This is one of the biggest benefits offered by the VA loan program.

5. Shopping around for home insurance.

On a typical home loan, the monthly payments are determined by four components, commonly referred to as PITI. Here are those four components:

  • Principal: The actual amount of money borrowed (i.e., the loan balance).
  • Interest: The cost of borrowing the money, represented as a percentage of the loan balance.
  • Taxes: Property taxes levied by your local government or municipality.
  • Insurance: The cost of both homeowners insurance and, if applicable, private mortgage insurance (PMI).

Anything you can do to reduce these four components will also lower your monthly mortgage payments. We’ve covered some of these items already, such as making a down payment to reduce your principal loan balance.

Shopping around for home insurance can also help you save money and lower the monthly payments on your VA loan.

Home insurance premiums are typically rolled into the monthly mortgage payments, as part of the PITI formula above. So if you get a good deal on a homeowners policy, you’ll further reduce the size of your VA loan payments.

6. Paying discount points at closing.

We took a closeup look at discount points in a previous blog post, in the context of VA loans. Here’s the short version:

Discount points are upfront fees paid to the lender at closing in exchange for a lower interest rate over the life of the loan. One discount point typically costs 1% of the total loan amount.

With each discount point you buy, your interest rate drops, often by about 0.25%. While this might seem like a small “discount,” it could create substantial savings over time while reducing your monthly payments.

This is similar to the down payment strategy covered earlier. In both cases, a trade-off is taking place. You’re paying more money upfront in order to reduce your long-term costs and lower your monthly payments.

Not all of these strategies will apply to your particular situation. The goal here is to help you understand some of the ways you could potentially reduce the monthly payments for your VA loan, allowing you to pocket more of your paycheck every month.

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