Should San Diego veterans, buying a home, with funds available for a down payment, choose a VA home loan or a conventional loan with Private Mortgage Insurance? Let's look at the differences between the two and see which makes more sense today.
Today (2/10/2009) a VA home loan is offered at 5.0% with a 1.25% fee (sometimes called a discount point). For a $400,000 loan, that translates to a $5,000 cost to receive that interest rate. A conventional loan is offered at 5.0% with a 1% fee (sometimes called a discount point). For a $400,000 loan, that translates to a $4,000 cost to obtain that rate. The "cost of credit" then is $1,000 more expensive...TODAY...to obtain a VA home loan.
NB: Rates/terms change daily so tomorrow might have a different variance.
Conventional mortgages, in California, require a 10% down payment. Down payments of less than 20% require private mortgage insurance to be carried by the borrower (this insures the lender against default). This would add a monthly premium of about $210.00. That extra cost feels like an extra .625% on the rate.
VA home loans don't require private mortgage insurance. The VA insures the lender against default by charging a "funding fee"; they increase the loan size by the funding fee to collect it.
Nota Bene: The new VA funding fee schedule (implemented November 2011) is much more advantageous than the 2009 funding fee schedule.
Compared side-by-side, the VA loan charges a funding fee of $5,000 while the conventional loan charges $210/month in PMI. When we add back in the extra $1,000 it costs to obtain the commensurate rate (explained in paragraph two), the total extra costs to obtain a VA home loan, with no monthly private mortgage insurance, are $6,000. That $6,000 is recovered in 29 months. If we assume a minimum five year holding period for the property, the VA home loan is about $6,200 cheaper than the conventional mortgage option.
RELATED ARTICLES ABOUT VA HOME LOANS:
Can More Than One Person Be On a VA Home Loan?
VA Home Loan Basics
RELATED ARTICLES ABOUT SHOPPING FOR A HOME LOAN:
Mortgage Advice for San Diego Home Buyers
Why You'll Never Get the LOWEST Rate on Your Mortgage
