Veteran's Administration, or VA loans for military personnel and individuals who have been honorably discharged from the military allow those individuals to purchase a house with no money out of their pocket, effectively making the mortgage loan a no closing cost mortgage. The cost is there and I'll hopefully show you why VA mortgages are not the best way to go.
When you get a conventional mortgage, most lenders will charge you a 1% origination fee on top of normal fees that are charged for a mortgage. That 1% is an additional charge on top of other customary closing costs like appraisal fee, credit report fee, processing fee, title insurance, etc, so that brokers can be paid and people can earn a living. While that in of itself is not bad, competition allows other lenders to not charge that fee. Ultimately however, you need to look at the total cost for acquiring a mortgage to ensure that you get a good deal. This is all not applicable of course if you are NOT getting a no closing cost mortgage.
When you take out a VA mortgage, you also pay an origination fee like I mentioned above. With VA loans though, instead of paying PMI, or Private Mortgage Insurance, you pay a fee to the VA so that they can guarantee your mortgage. BUT, if you have equity in the house or as a down payment, AND you have good credit, save your money because the VA charges the following fees to guarantee your mortgage.
| Type of Veteran | Down Payment Amount | First Time Use | Subsequent Use for Loan until 09/30/11 |
| Active Duty | None Between 5%-9.99% 10% or more | 2.15% 1.50% 1.25% | 3.30% 1.50% 1.25% |
| Reserves/National Guard | None Between 5%-9.99% 10% or more | 2.40% 1.75% 1.50% | 3.30% 1.75% 1.50% |
So let’s take a look at this ‘deal’ that is offered by the VA. If you take out a $150,000 mortgage, you will normally pay $1,500 for your origination fee to the mortgage broker. I would argue that you can do better, but not too bad and not the topic of this article.
If you get your mortgage through the VA however, which is still done through a lender, your closing costs would be higher. I’m going to use the same table above, but replace the percentages with the dollar amount based on a $150,000 mortgage amount to show you the total cost to get a VA no closing cost mortgage.
| Type of Veteran | Down Payment Amount | First Time Use | Subsequent Use for Loan until 09/30/11 |
| Active Duty | None Between 5%-9.99% 10% or more | $3,225 $2,250 $1,875 | $4,950 $2,250 $1,875 |
| Reserves/National Guard | None Between 5%-9.99% 10% or more | $3,600 $2,625 $2,250 | $4,950 $2,625 $2,250 |
So if you add in the $1,500 the lender will charge you to originate the loan, you are looking at a minimum of $3,375 in closing costs. What the VA allows you to do though is finance you closing costs into the amount of your mortgage. So theoretically, you could be paying interest on that $3,375 for 30 years! Now those closing costs, if paid out over 30 years at today’s rate of 5% will cost you $3148.20 in interest! So in effect, you are paying $6,523.20 to take out the VA mortgage. This is also assuming the lowest funding fee charge, so really, for Active Duty members putting down 10% or more to purchase their house! So you can see how taking out the VA loan is actually quite expensive to do. If you could save money to put down on down payment or even to pay for your closing costs out of your pocket, that would be the best way to go.
Now granted, I realize that these numbers actually apply to those individuals who only take out that one mortgage and live in their house and actually pay off their mortgage at the end of that original 30 year mortgage. Statistics show us that this is not the case and that most Americans actually move approximately every seven years. Once you are in the house though, don’t spend the money on frivolous items, save the money for that house your going to purchase in the future. The best way to keep the money in your pocket is look for no or low closing cost mortgages.
As I have hopefully demonstrated above, the VA no closing cost option is really a misnomer because the cost is large, it is just hidden in 360 small payments in regards to the closing costs being financed into the 30 year mortgage and with interest charges over that long time period, the closing costs are almost double!
Another drawback to VA mortgages is because of the increased regulation for the guarantee of the loan by the federal agencies, mortgage lenders usually charge a higher rate for the same mortgage too. So not only are you paying for your closing costs over a long period and higher cost in the form of paying interest on your closing costs, you also are looking at paying a higher interest rate for that mortgage. The payments on a $150,000 5% mortgage is $805.23 versus the higher rate of a VA mortgage at 5.125% which is $816.73. That’s only $11.50 per month, but with 30 years of payments, that’s $4,140. If you throw in the interest expense for the closing costs being financed, your looking at over $7,000 in extra interest, just for the benefit of going with a VA no closing cost mortgage. For me at least, that is no good.
If your still active duty and will be PCS’ing approximately every 2-4 years, then PenFed’s 5/5 ARM would be the best way to go or another comparable ARM because you should theoretically be moving before the 5 year ARM adjusts.. The way it works is your mortgage your rate is fixed for five years and then it resets every five years. PenFed will also cover most of your closing costs so that your out of pocket expenses are minimal. That would be the best way to go, and then you could refinance, if you had enough equity, with a no closing cost mortgage.
Many states also have localized mortgage programs for residents of their states which can offer low interest rates, low closing costs, and other benefits that you won’t find with VA loans. They do of course come with stipulations like you cannot sell the house for a certain period of time, you cannot rent out the house, etc. Check in your state to see what programs are offered that you may qualify for.
As long as you have cash in hand for down payment or closing costs, that would be the best way to go because of the cost. And because of the nature of the Active Duty military and really, the way we Americans move around approximately every seven years, getting loans for with closing costs are a big drain on your personal finances and your cash pile.
I will include more information once I have more information, but Wells Fargo has a 1-2-3 No Closing Cost refinance mortgage available for existing customers as well non customers in which they will refinance your mortgage for no closing costs as long as you fit their lending requirements. I don’t know what their requirements are, however, this is my profile:
Credit Score: Over 720
Debt to Income: Less than 30%
Home Loan to Value: Less than 65%
If you fit this profile or are similar, it wouldn’t hurt to take 20 minutes of your time and see if you qualify. I can’t vouch for the program at this point, once I close on my mortgage I will write up an article on my experience.
As you can see, with good credit and cash in your pocket, you can get a no or low closing cost mortgage with minimal costs and not get ripped off with a VA mortgage. This would be the best way for your personal financial situation and allow you to ultimately get the best deal possible. Remember though, that lenders will try and get as much money from you as possible, so be prepared to shop around to find that mortgage deal. If a lender tries to pull a fast one by changing details of the deal at the last minute thinking you will still take that mortgage, then be prepared to walk, or be taken advantage of.
As this article shows, VA mortgages are not the a good deal for mortgages out there because of minimal or no closing cost mortgages through traditional methods available out there so that can acquire a no or low closing cost mortgage without going through a federal program that actually costs more than a conventional mortgage.
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