Marcus Marion, CMA™ Home buyers who use the VA loan program to buy a house are often surprised to learn that there’s not just one type of VA-backed mortgage loan. You actually have several choices to make when applying for one of these mortgages.
One of those choices has to do with the length of the repayment term.
If you use a fixed-rate VA loan to buy a house, you could choose between a 15-year or 30-year term. And both of these options have specific pros and cons.
This guide will walk you through the advantages of using the more popular 30-year term, along with the benefits of going with the shorter 15-year option.
Some Terminology You Need to Know
Let’s start with a quick terminology review. Here are some of the most important terms that are used throughout this guide.
VA Loan: This is a type of mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA). It’s designed to help eligible veterans, active-duty service members, and certain surviving spouses purchase homes with favorable terms, such as no down payment or private mortgage insurance.
Term: The term of a mortgage loan refers to the length of time over which the borrower agrees to repay the loan. It’s typically expressed in years, such as 15 years or 30 years. The term determines the number of monthly payments the borrower will make to pay off the loan over time.
Amortization: Amortization is the process of gradually paying off a debt, such as a mortgage loan, through regular payments over a specific period. Each payment covers both the interest charged on the remaining balance and a portion of the principal (the original loan amount). Over time, the balance decreases until the loan is fully paid off.
VA Loans Can Have Either a 15- or 30-Year Term
The U.S. Department of Veterans Affairs publishes a handbook that’s geared toward home buyers. It’s called the “VA Home Loan Guaranty Buyer’s Guide,” and you can find a PDF copy online just by searching the title.
In addition to covering other important topics, this handbook explains the different term lengths you can choose when using a VA loan:
“A loan term refers to the length of time and feature of a loan. VA can back loans that are either 15 or 30-year terms. Also, terms include fixed-rate and adjustable rate mortgage (ARM).”
This quote covers two important points:
- If you use a VA-guaranteed mortgage loan to buy a home, you can choose between an adjustable-rate mortgage (ARM) loan, or the more popular fixed-rate option.
- If you choose a fixed-rate loan, you can also choose between a 15-year amortization / repayment term, or the longer and more popular 30-year term.
The standard 30-year fixed-rate mortgage loan is by far the most popular financing option among home buyers in the United States. Even so, you’ll want to explore all of your options and choose the right loan structure for your particular needs.
Pros and Cons of Both Options
Different loan terms bring different pros and cons into the picture. As a borrower, you need to understand the advantages and disadvantages in order to make an informed decision.
Here are the pros and cons of both the 15-year and 30-year VA loan:
Pros of a 15-Year Mortgage
- Lower interest rate: You typically get a lower interest rate with a 15-year loan compared to a 30-year loan. This translates to significant savings on interest over the life of the loan.
- Faster payoff: By cutting the amortization window in half, you’ll be able to pay off your VA loan (and fully own the home) much sooner.
- Builds equity faster: Since you’re paying down more principal each month, you’ll build equity in your home faster. This can be beneficial if you need to sell your house down the road or want to use a home equity loan.
Cons of a 15-Year Mortgage
- Higher monthly payments: The shorter repayment term means your monthly payments will be higher than a 30-year loan for the same amount of money borrowed. This could potentially strain your budget.
- Less flexibility: A larger chunk of your income goes towards your mortgage payment, leaving less wiggle room for other expenses or unexpected costs.
Pros of a 30-Year Mortgage
- Lower monthly payments: This is the most significant advantage. Your monthly payment will be lower than a 15-year loan for the same loan amount. This frees up cash flow for other expenses or savings goals.
- More flexibility: Having a lower payment gives you more breathing room in your budget and allows you to manage other financial obligations more comfortably.
Cons of a 30-Year Mortgage
- Higher interest rate: You’ll likely pay a higher interest rate on a 30-year VA loan compared to the 15-year option. This means you’ll end up paying much more in interest over the life of the loan.
- Slower equity build-up: You’ll build equity in your home at a slower pace because a larger portion of your initial payments go towards interest.
- Longer debt: It takes twice as long to pay off the VA loan, meaning you’ll be tied to a mortgage payment for a longer period of your life.
How to Choose the Right Option for You
When using a VA loan to buy a house, you have to consider your personal financial situation and long-term housing goals. This kind of soul-searching will help you choose the better option between the 15-year and 30-year VA loan terms.
It really comes down to a matter of priorities:
If you prioritize paying off your home faster and saving on interest, a 15-year mortgage might be a good option. Just make sure you can comfortably handle the higher monthly payments.
If you need to keep your monthly housing costs lower for more financial flexibility, a 30-year mortgage may be preferable. Remember though, you’ll end up paying more in interest over time. It’s a tradeoff.
Chances are, you’ll see yourself in one of the above statements—but not both of them. Choose the scenario that more closely reflects your mortgage financing priorities, and you’ve got your winner!
