The short answer is hell yes! But there’s some fees you have to take into account. There may very well be times where VA isn’t the most cost effective choice for you.
In order to really compare pricing on loan programs, you must first understand how loan pricing works. Everyone focuses on interest rates, and interest rates alone. What people don’t realize is that every interest rate comes with a certain level of cost.
That cost can be expressed differently with different lenders. It’s not uncommon for banks to get cute with terms. Points, discount points, origination can all be terms used to express the same fee. For purposes of explaining how loan pricing works I’m going to use the term “points”.
So what exactly is a point. Easy…a point is a fee you pay for the interest rate you select (yes you can select the rate you want). The cost of one point is equal to one percent of your loan amount. So if you’re borrowing $200,000 and you’re paying one point, that equates to $2,000 in fees.
Know this right now…there is a certain amount of points associated with every interest rate. And newsflash, the interest rate that carries zero points is not the lowest one. Here’s an example of what your rate options might look like for a $200,000 loan (these rates do not reflect today's rates and pricing).
Rates - Points (Cost in Dollars)
2.875% - 2.560 ($5,120
3.000% - 2.040 ($4,080
3.125% - 1.622 ($3,244
3.250% - 1.544 ($3,088
3.375% - 1.272 ($2,544
3.500% - 0.852 ($1,704
3.625% - 0.556 ($1,112)
3.750% - 0.368 ($736)
You’ll notice that there’s an inverse relationship with rates and points. As the rate gets lower, the points (and thus costs) get higher. Understand that points are added to your standard closing costs.
So now that you understand how pricing works, here’s what you need to understand about VA loans. All things being equal your rate options will likely be less expensive (meaning have lower points) with a VA loan versus any other loan product.
However, the VA charges and additional fee (on top of points) that other loans do not charge. That fee is called the “VA Funding Fee”. If you are a disabled veteran and thus exempt from the funding fee, in most cases the VA option is likely to be a no-brainer for you. But if you’re not exempt from the funding fee, you need to consider this when determining which loan program is the least expensive.
As of April of 2020, the funding fee can be as much as 3.6%. So while the funding fee is not “points” per se, who cares?! Money is money. A fee is a fee. Paying the VA a 3.6% funding fee, is just like paying 3.6 points on a different loan product. And in some respects that’s how you should compare the pricing.
If you’re required to pay a 3.6% funding fee I would compare the rate you can get at zero points with VA, to the rate you can get on another loan product at 3.6 points.
But you also have to consider how points are paid, versus how the funding fee is paid. Points must be paid at closing. They can only be rolled into the loan if you are refinancing. If you’re buying a home, all points (and other closing costs) will be paid out of pocket at the closing table. The funding fee however can be financed.
So even if you can get a lower rate by paying 3.6 points on a different loan program, if you want to keep your out pocket costs down when buying a home; the slightly higher rate on the VA loan may be the better option.
VA rates are still incredibly low, and the funding can be financed. That is a major advantage of the VA loan program.
Which begs the question, “What are all the advantages of doing a VA home loan?”
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VA Loans With Ed was created by a veteran for veterans. This is the premier source for veterans to learn everything they need to know about the VA loan, and get the most out of the benefit they earned.