How To Lower Your VA Funding Fee While Avoiding VA Adjustable Rate Mortgages

One of the most attractive things about VA loans is that you are not required to make a down payment. Because VA loans are backed by the U.S. Department of Veterans Affairs, the down payment is optional. But if you make no down payment or a very small down payment, that will affect your VA funding fee. Essentially, when buying a house, the lower your down payment, the higher your funding fee. So, there’s a downside to making a small down payment on your VA loan.

But there are ways to lower your VA funding fee. You may even be able avoid it completely if you’re eligible to receive VA compensation for a service-connected disability, since there are funding fee exemptions for Veterans. In this article, we’ll explain how to lower or avoid your funding fee, plus give you more tips and tricks to lower your VA mortgage costs. In particular, we’ll go over the big differences between a 15-year mortgage and a 30-year mortgage, plus let you in on the truth about adjustable rate mortgages.

How To Calculate Your VA Funding Fee

What is the VA funding fee? It is one of the loan closing costs you will have to pay on your VA loan. Closing costs include the lender fees, termite report, the loan origination fee, third party fees (like title or escrow company costs) and more. There are also funds needed to establish your escrow account to pay real estate taxes and insurance.  But, when buying a home, the funding fee is a closing cost that you can control. According to the VA’s website, it lowers the cost of your loan for U.S. taxpayers – it’s a way of covering losses if you default on your loan by paying your lender some or all of their foreclosure costs. Because VA loans are backed by the government, your lender is partially protected from a borrower who defaults. But for the government and the lender to be protected, money has to come from somewhere. It’s kind of like government-mandated insurance for your loan. You’ll have to pay it, either in one payment when you first get your mortgage on a VA loan, or over the course of your mortgage in the form of a monthly fee which is typical for conventional loans.

You can easily calculate your funding fee to an approximate value based on the type of loan you get and the total amount of your loan. It also depends on your down payment and whether this is your first VA loan. Below we’ll walk you through how to calculate your funding fee.

If you’re applying to purchase a home, your funding fee will depend on your down payment and whether this is your first VA loan. See the chart below for your funding fee based on current 2021 VA guidelines:

Down Payment Amount Less than 5% Between 5% and 10% More than 10%
First VA Loan 2.3% 1.65% 1.4%
Subsequent VA Loan 3.6% 1.65% 1.4%

Let’s say you’re buying your first home for $100,000 and you can afford to put down 7% of the sales price which would come to $7,000 and a $93,000 loan amount. Since you’re paying 7% in your down payment, and since this is your first VA loan, your funding fee will be 1.65%. That means that you’ll be charged 1.65% loan amount. On your loan amount of $93,000 you multiply your funding fee, 1.65% or .0165, with $93,000. Your funding fee will come to $1,534.50.  One last bit of good news is that the funding fee can be rolled into the loan, you don’t have to pay it in cash at closing.

How To Lower Your VA Funding Fee

Remember that we said your funding fee will decrease as your down payment increases? You can see that in the chart from the last section. As you move to the right in the chart, you increase your down payment, and your funding fee decreases. You’ll notice that if you’re getting a second or third VA loan and your down payment is less than 5% of the loan amount, your funding fee increases dramatically, from 2.3% to 3.6%. That can be a huge increase. But if you pay more than 5% in your down payment, the funding fee actually stays the same as for your first VA loan. To keep your funding fee low, it would be best to pay more than 5% on your down payment if this isn’t your first VA loan!

Other VA-backed loans have funding fees, not just loans for to purchase a home. If you’re applying for a cash-out refinance, your funding fee only depends on whether it’s your first or subsequent use of a VA loan. Your funding fee for your first use is 2.3%, and it’s 3.6% after your first use. Your funding fee will always be 0.5% for an interest rate reduction refinance loan (IRRRL).

How To Avoid A VA Funding Fee

If you are eligible to receive VA compensation for a service-connected disability, you can completely avoid a VA funding fee. The VA website provides multiple specific situations in which you wouldn’t have to pay the VA funding fee. You may even be able to avoid the funding fee as a surviving spouse of a Veteran.

If you’re a Veteran receiving VA compensation for a service-connected disability, you can avoid the funding fee. You can also avoid it if you are a military service member with a proposed or memorandum rating before the loan closing date that says you’re eligible to get disability compensation because of a pre-discharge claim. If you are active duty and you provide evidence of having received the Purple Heart, you are also exempt from paying the funding fee.

If you are the surviving spouse of a Veteran, you may also qualify to avoid the funding fee. This is only possible if you’re receiving Dependency and Indemnity Compensation. Your spouse must have died in service, or died from a service-connected disability, or must have been completely disabled for you to qualify for a VA loan.

To apply for a disability rating, you’ll need to go to this page on the VA website. You’ll need evidence to support your claim, which might be VA medical records and hospital records relating to your claimed condition. These medical records can also come from private records and non-VA hospital records. Family, friends, coworkers, clergy, and law enforcement personnel can also submit supporting statements with knowledge about your disability. The VA offers counselors to help you fill out your claim, and once you’ve applied, the VA will review your application and notify you of their decision in the mail.

Funding Fee Exemptions For Veterans

In summary, you can only completely avoid paying the funding fee if you have a VA disability rating. Otherwise, you can get a lower VA funding fee by making a larger down payment. It may feel counterintuitive, but paying more now will save you money in the long run.

The VA funding fee isn’t the only situation where that holds true. As you think through your down payment, you may also be thinking about your monthly payments and considering whether a 15-year or 30-year mortgage is best for you. Just like the funding fee, paying more now will save you a significant amount of money in the long run. We suggest that you consider a 15-year mortgage, but paying off your home in 15 years isn’t always a good idea for everyone. Read on to hear the pros can cons of 15 year mortgages for Veterans!


The Benefits Of Choosing A 15 Year Mortgage Over A 30 Year Mortgage

Most Americans who get a mortgage choose a 30-year mortgage. It’s the classic mortgage time frame, and the rules and regulations for 30-year mortgages are well-known. But the often-overlooked 15-year mortgage should get more attention. When you’re looking for a VA loan, we suggest you consider a 15-year mortgage as a viable option for.

First, we’ll explain what your monthly payments will look like. When you make a monthly payment on a fixed-rate mortgage, you pay the same amount every month. But in that monthly payment, you’re paying off your loan while also paying interest. At first, most of your monthly payment will be interest since interest is calculated based on the loan amount you haven’t yet paid off. But as time goes on, you’ll pay more and more of the loan amount in each monthly payment.

Say you take out a $20,000 loan with a 4% interest rate. If your monthly payment is going to be $200 per month, this is what the breakdown will look like for your first month:

Month Starting Loan Balance Payment Interest Paid Principal Paid New Loan Balance
1 $20,000 $200 $66.67 $133.33 $19,866.67

Now that you’ve paid off some of your loan balance, you’ll pay less interest on each subsequent month as your loan balance goes down. Here’s what your next few months would look like:

Month Starting Loan Balance Payment Interest Paid Principal Paid New Loan Balance
2 $19,866.67 $200 $66.22 $133.78 $19,732.89
3 $19,732.89 $200 $65.78 $134.22 $19,598.67
4 $19,598.67 $200 $65.33 $134.67 $19,464.00

You can see that with each month, the amount of your payment that goes toward interest decreases, and the amount that goes toward your actual loan balance (called your principal payment) increases.

You’ve probably heard that monthly payments on a 30-year mortgage are less than monthly payments on a 15-year mortgage. That’s true! With a 30-year mortgage, your monthly payments will be more affordable. That’s because you’re paying your mortgage off over 30 years instead of 15 years, so you probably won’t need to pay as much each month. Your monthly payment will be fixed, so you would pay the same amount every month for thirty years – and if you compare that amount to what you would pay every month with a 15-year mortgage, the monthly payment will definitely be smaller.

Here’s why a longer mortgage means you’re paying more: if you pay off your loan amount more slowly, like on a 30-year mortgage, you’ll pay larger amounts of interest for longer because your loan balance will shrink slowly. But if that balance shrinks faster, your interest payments will shrink faster, too! Overall, you’ll pay a lot less in total if your loan amount shrinks faster. To do that, you have to make higher monthly payments. That’s why a 15-year mortgage will save you more money in the long term. You’re decreasing the amount of interest you pay. When you combine these savings with the fact that your interest rate will probably be lower on a 15-year mortgage than on a 30-year mortgage, it’s clear that a 15-year mortgage has great benefits!

So, if you can afford to make a higher payment, we recommend going with a 15-year mortgage.  If a higher payment sounds stressful to you then a 30-year mortgage is probably the best for you.  But, remember that VA mortgages don’t have prepayment penalties so you can always make extra payments to pay your 30-year mortgage off faster which will save you a lot in interest if so make extra payment consistently.

Other factors affect your interest rate too, like your credit score. If you have a great credit score, a lender is more likely to give you a lower interest rate. That’s because you have a history of making your credit payments on time, so they trust that you will make your mortgage payments on time, too. If they feel good about getting their money back, they will lower your rate. But if your credit score has had some challenges in the past, lenders will be more hesitant to loan to you, and they will raise the interest rate on the loan. Once again, this is because they are taking a risk, and anytime a lender takes a risk they need to make it worthwhile for themselves.

Another key factor in determining your interest rate is your down payment. As we’ve discussed, one of the great benefits of a VA loan is that you are not required to make a down payment, and you are not required to pay for private mortgage insurance if you make a down payment less than 20% of the loan amount.

The Risks With VA Adjustable Rate Mortgages

In this article, we’ve talked a lot about funding fees, down payments, and how to keep your funding fees and interest rate low. But our advice about interest rates made an assumption – that your VA home loan is fixed-rate. We compared 30-year fixed rate mortgages to 15-year fixed rate mortgages. You may have heard that there’s another option. We’ll explain what a VA adjustable-rate mortgage is, and tell you why a fixed-rate mortgage is better.

A VA adjustable-rate mortgage doesn’t have a fixed interest rate. Fixed-rate mortgages, which we’ve been talking about in this article so far, have a set interest rate that doesn’t change over the life of the mortgage. Every time you make a payment, you are paying interest at the rate you agree to when the loan closes. But adjustable-rate mortgages are just what they sound like. The interest rate of this kind of mortgage is adjustable.

Adjustable-rate mortgages can sound appealing because lenders will sometimes offer you a lower interest rate on an adjustable-rate mortgage than on a fixed-rate mortgage. But with an adjustable-rate mortgage, you are more at risk. That’s because your interest rate will be dependent on factors in the economy that are completely out of your control. So if rates rise, your interest rate on your mortgage will rise which will make your monthly payment higher. Of course, if rates fall, your interest rate will fall and you will save money. That’s why some people take the risk and choose adjustable-rate mortgages; they hope that rates will fall, and their interest rate will fall accordingly.  But, any drop in the rate on your adjustable-rate mortgage will be temporary when the rate goes back up.

Economists predict that rate will be higher after 2021. The economy is growing, and as it grows, interest rates rise. You probably won’t see huge spikes, but as the economy expands, interest rates go up too. If you were to get an adjustable-rate VA loan right now, you would be at significant risk of seeing your interest rates rise throughout in future years. But if you get a fixed-rate VA loan, you can lock in the lower interest rate before rates rise higher in the future.

You may be wondering if can still get a VA loan at all if rates are going up. You still can! You should act fast to take advantage of current interest rates. At HomePromise, we want the best for you, and we are home loan experts. We can give you personalized advice about funding fees, 15 or 30-year mortgages, adjustable-rate loans, and more! If you’re wondering whether it makes sense for you to get a VA loan right now, we can help. Applying with us is always free, so call now at 800-720-0250.


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