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Down payment lowers funding fee
The chief benefit of making a down payment is paying a lower funding fee, says Joe Parsons, senior loan officer for PFS Funding, a mortgage company in Dublin, California.
The funding fee supports the loan guaranty, which encourages lenders to offer VA loans at lower rates and with easier qualifying guidelines.
Borrowers typically finance their funding fee as part of their loan amount rather than pay it upfront at closing.
VA borrowers in the Reserves or National Guard pay a slightly higher funding fee with or without a down payment.
Borrowers who have a service-connected disability are generally exempt from funding fees.
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First-use funding fees lower with down payment
The funding fee for eligible first-time homebuyers is 2.15% of the loan amount with no down payment.
With a 5% down payment, the fee is reduced to 1.5%. With 10% or more down, it drops to 1.25%.
For a $200,000 loan with a 3.5% interest rate and 30-year term, those down payments would save the borrower about $7 and $9 each month, respectively, compared with the zero-down option.
These figures don't take into account how the higher down payment would affect principal and interest payments. They show only the funding fee portion of the payment.
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Subsequent funding fees higher
The funding fee is 3.3% for VA buyers who use the program to buy their next home if they don't make a down payment.
With a down payment, the funding fee for subsequent-use again drops to 1.5% with 5% down, and 1.25% with 10% down.
For example, the monthly principal and interest payment for a $200,000 home loan with no down payment, a 3.5% interest rate and 30-year term is $898.
Financing the 3.3% funding fee adds $6,600 to the loan amount and raises the payment by $30 to $928.
A 5% down payment reduces the fee to $3,000 and the payment to $912.
That means the borrower would save about $16 each month, says Mike Dill, corporate trainer at Guaranteed Rate, a mortgage company in Chicago.
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Down payment lowers monthly payment
Don't forget that a down payment also lowers the borrower's base loan amount and monthly mortgage payment.
"The 5% down payment factors in (to the savings) as well because you're financing 5% less," Dill explains.
For borrowers who need to "target their payment within a certain range," to use Dill's characterization, a down payment could mean the difference between qualifying for the loan and not qualifying.
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Down payment finances future closing costs
A down payment could make it easier to sell a home if the buyers want to move before they build equity through monthly payments or appreciation and without paying closing costs out of pocket.
Closing costs to sell can be 6% or more of the home's value.
"If you didn't have any equity, potentially you'd have to write a check for that amount," Frueh says.
The alternative could be a default or even foreclosure.
Other uses for your cash
Despite these advantages, only 22% of VA buyers made a down payment in 2015, according to Frueh. The other 78% bought with no money down. The VA doesn't track how many subsequent-use borrowers rolled over equity from a prior home they sold toward a down payment.
Frueh says the average VA borrower has only about $10,000 at closing.
That cash might be better used for home-related purchases, repairs or other purposes.
As Dill says, "The advantages of putting money down are so slim compared with keeping that money in case you have repairs or as a safety net."
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Consider return on investment
Parsons says borrowers could invest the money they didn't use for a down payment in other assets or use it to pay off consumer debt, such as an auto loan, credit card or student loans.
A borrower who purchased a $200,000 home and later sold it for $300,000 could net $80,000, use $30,000 to make a 5% down payment for a new $600,000 home and keep $50,000 in cash, tax-free, he suggests.
"I think that's a great strategy," he says.