Not Every VA Mortgage Is a Good Deal

Sometimes it is.

Sometimes it isn't.

One of the things I love about VA financing is that it gives eligible buyers tremendous flexibility with their cash. On a $400,000 house, a conventional buyer putting twenty percent down has moved $80,000 from the bank account into the property before we even start talking about the other costs of buying and moving.

A VA buyer may not have to do that.

That can be enormously valuable, especially for a military buyer who knows life has a habit of changing plans. Orders happen. Retirement happens. Cars need replacing. Houses need repairs. You may end up moving across the country. And the HVAC system never checks your savings balance before deciding it's had enough.

Keeping money available has value.

That's why I've never bought the idea that making the largest possible down payment is automatically the financially responsible thing to do. I've worked with plenty of veterans who had enough cash for a substantial down payment and made an informed decision not to make one, because the VA loan gave them better uses for that money.

The mistake is turning that flexibility into another blanket rule and saying a veteran should always put zero down.

If you aren't exempt from the VA funding fee, the amount you put down can materially change that fee. For current VA purchase loans, a first-time user putting less than 5% down generally pays a 2.15% funding fee. At 5% down, the fee drops to 1.5%, and at 10% down it drops to 1.25%. On subsequent use, the less-than-5% fee is generally 3.3%, while the 5% and 10% tiers drop to the same 1.5% and 1.25%.

Now we have something worth calculating.

If you're using VA for the second time, aren't exempt from the funding fee and have enough cash to put 5% down comfortably, I want to see what that does to the total loan. Maybe reducing the funding fee makes the down payment attractive. Maybe keeping the cash is still more valuable. We don't know until we run both scenarios.

For a veteran who is exempt from the funding fee, that calculation changes again.

VA doesn't charge the funding fee to a veteran receiving compensation for a service-connected disability, along with certain other qualifying borrowers. For the typical veteran, regular disability compensation begins at a 10% service-connected disability rating, which is why we pay close attention when someone tells us they have a rating of 10% or more. The actual exemption is based on the veteran's qualifying VA compensation or other exemption status, so I still want the lender to verify it instead of assuming based on a percentage.

For that borrower, the financial argument for putting money down just to reduce the funding fee disappears.

That doesn't automatically mean zero down wins. Maybe reducing the loan balance produces a payment the buyer strongly prefers. Maybe the interest rate pricing changes. Maybe the buyer has more cash sitting idle than they realistically need and wants a smaller mortgage.

Fine.

We compare.

What I won't do is tell a veteran "VA is zero down" as though that ends the financial analysis.

The benefit isn't that VA tells you what to do with your money.

The benefit is that VA gives you choices.

This is probably the easiest way to get a mortgage shopper's attention.

Put a beautiful interest rate in large print.

Everything else can go underneath it.

The problem is that an interest rate doesn't tell me what it cost you to get that interest rate.

If Lender A offers 5.75% with little or no discount points and Lender B offers 5.50% but wants thousands of dollars upfront to buy the rate down, I can't tell you which loan is better by staring at 5.50 and 5.75.

I need the rest of the math:

That last question is especially important for military buyers.

If you spend $6,000 buying down an interest rate and the lower payment saves you $100 a month, it takes five years just to recover the $6,000.

If you sell the house in three years because orders changed, you never reached the break-even point.

The lower rate was real.

The savings weren't.

That doesn't mean paying points is bad. If you're retiring in South Alabama, expect to keep the home for twenty years and can buy a meaningfully lower rate at an attractive cost, paying points may be an excellent decision.

The problem is making that decision based on the rate instead of the cost.

VA itself tells borrowers to compare lenders, because lenders set their own interest rates and fees.

I'd go further.

Don't ask three lenders, "What's your VA rate?"

Ask them to price the same loan structure so you can compare apples to apples.

Then ask for the Loan Estimates.

A rate quote over the phone is a sales conversation. The Loan Estimate gives us something we can actually put beside another lender's numbers.

I've spent enough time around military lending to be especially skeptical of a rate that looks dramatically better than everybody else's. Sometimes there's a legitimate reason. Sometimes the borrower is paying for it in points. Sometimes the advertised rate assumes a loan term, credit profile or structure that has very little to do with the buyer who clicked the ad.

The CFPB has taken enforcement action against lenders that marketed VA-guaranteed mortgages using misleading representations about rates, APRs, payments and other loan terms. In some cases, advertised terms weren't actually available as presented.

That isn't ancient history to me. It's a reminder that veterans are an attractive mortgage market.

So by all means, shop the rate.

Just don't stop there.

Financing the funding fee is one of those things that can be completely reasonable and still deserves to be understood.

VA allows borrowers who owe the funding fee to pay it at closing or finance it into the loan.

Most buyers look at those options and understandably say, "Put it in the loan."

Sometimes I'd say exactly the same thing.

If paying an $8,000 funding fee in cash would wipe out a big chunk of your emergency fund, financing it may be far better than arriving at your new home with an impressively small mortgage and almost no money in the bank.

But putting a fee into the mortgage doesn't make the fee disappear.

You borrowed it.

If the funding fee is $8,000 and we add it to your loan, you now owe $8,000 more than you otherwise would, and you'll pay interest on that additional balance for as long as it stays part of the mortgage.

Again, maybe that's the right trade.

I simply want you to know you made it.

I also want us to verify that you actually owe the fee in the first place.

VA exempts veterans receiving compensation for a service-connected disability, as well as certain other qualifying borrowers. It also provides a refund when a veteran later receives a qualifying disability award that's retroactive to a date before the loan closed.

That last piece is one I especially want veterans to remember.

Imagine you close on the house while a disability claim is still pending. You pay or finance the funding fee because you aren't exempt at closing. Months later, VA approves the claim with an effective date before your closing.

That funding fee may be refundable.

Depending on the loan amount, we may be talking about thousands of dollars.

I don't want that money disappearing into the mortgage because nobody ever told the veteran to revisit the funding fee after the disability decision came through.

Good VA representation is often less glamorous than people imagine.

Sometimes it's remembering to ask six months later whether the veteran got their money back.

This is where veterans need their guard up.

If you have a VA mortgage, especially one with a rate higher than whatever lenders are currently advertising, you're going to be marketed to.

Probably a lot.

Some of those offers will be legitimate opportunities to save money. The VA Interest Rate Reduction Refinance Loan, usually called an IRRRL or streamline refinance, can be an excellent tool for the right borrower.

But "we can lower your interest rate" doesn't answer the question I care about.

I want to know what it costs to lower it.

The CFPB and VA have specifically warned veterans about refinance offers promoting extremely low rates, skipped payments, cash back and "no out-of-pocket" transactions. Their warning explains that some of those offers can add thousands of dollars in costs to the new mortgage balance, even while producing a lower monthly payment.

That's the part veterans have to watch.

Say your existing payment is $2,400 and the refinance lowers it to $2,250.

Wonderful. You save $150 a month.

Now say the refinance adds $6,000 in costs to the new mortgage.

You need forty months of $150 savings just to recover the $6,000.

That's three years and four months before the transaction has merely paid back what it cost.

VA does have a recoupment rule for IRRRLs, generally requiring the fees and closing costs to be recovered through the lower payment within 36 months. That rule helps, but it's a minimum standard, not proof that the refinance fits your plans. You still need to ask:

Those questions can completely change whether the refinance makes sense.

This is also why I get especially irritated by refinance advertising that makes money appear out of nowhere.

"No out-of-pocket costs" doesn't necessarily mean no costs.

It can mean you didn't write a check because the cost was added to your loan.

"Skip a payment" doesn't mean the lender gave you a free month of housing.

"Get cash back" isn't automatically free money.

You have to understand where the money came from and what the new debt looks like afterward.

The CFPB has documented complaints from service members and veterans reporting misleading refinance offers and situations where the final loan terms didn't match what borrowers believed they'd originally been offered.

That doesn't mean you should be afraid of an IRRRL.

It means a lower rate is the beginning of the conversation, not the end of it.

Maybe.

This is the one I want people to sit with for a minute, because it goes beyond VA loans.

A smaller monthly payment feels like savings because that's how most of us experience our mortgage. We don't sit at the kitchen table every month thinking about lifetime interest. We see the amount leaving the bank account.

If that amount goes down, we feel richer.

But there are several ways to lower a mortgage payment that don't necessarily reduce the total cost of the debt.

One of the easiest is stretching the repayment period back out.

Say you're six years into a thirty-year mortgage. You refinance the remaining balance into a brand-new thirty-year loan.

Your interest rate drops.

Your payment drops.

You're thrilled.

But you just went from twenty-four years left on the mortgage back to thirty.

Whether that was a good trade depends on the rate reduction, the refinance costs, your plans for the property and how long you'll actually keep the new mortgage.

For some borrowers, it will still make excellent sense. A meaningful rate reduction can save enough interest to outweigh the effect of extending the term. Another borrower may value the monthly cash flow more than paying the house off on the original schedule.

There's nothing wrong with either decision.

The important thing is that we don't call every lower payment "saving money" without looking at what happened behind it.

That's one of the reasons I want veterans looking beyond the payment a lender quotes:

If somebody is trying to refinance you and can't explain those numbers clearly, I'd be very uncomfortable signing the paperwork.