Optimal Down Payment with VA Loan

[AndrewT]

Hello Mustachians! I've been reading the blog and forum for years but this is my first unresolved dilemma!

After years of renting during college and my time in the Army, my wife and I are considering buying a home in the Round Rock/Pflugerville/Cedar Park region north of Austin, TX. We have used the NY Times rent vs. buy calculator conservatively and have considered possible (likely) overvaluation of the regional market, but it still seems to make sense for us to buy.

With a VA loan, there is no down payment requirement or PMI, so traditional down payment advice doesn't really fit.

We have liquid assets of about 75% of the home price, so if the home price drops quickly and we have to bail out for some reason (underwater mortgage), we *could* sell assets to cover the difference, so I don't really think we need the equity cushion.

Intuitively, I think that it makes sense to use the VA loan and finance the entire home outright, investing the down payment in Vanguard (taxed accounts, assuming 401k is full either way). Am I missing something? Thanks!

[kendallf]

Could you get a better rate or closing costs on a conventional loan?  Sometimes you pay a bit more in percentage rate for a VA loan (I haven't checked recently, so that's not a blanket statement).  If not, I'd finance the whole thing.

[Crazydude]

You're absolutely right in thinking you can put the money saved to better work. I'm in the process of purchasing home using "second tier" benefit. In other words, I currently have a property with an active VA loan, so my funding fee for this one will actually be higher (percentage wise), but nonetheless still rolled into the loan. I have not heard of people getting better rates using conventional. This may be true, but I doubt it would make or break your decision to go one way or the other.

[Socmonkey]

"A basic funding fee of 2.15 percent (with 0% down) must be paid to VA by all but certain exempt veterans. A down payment of 5 percent or more will reduce the fee to 1.5 percent and a 10 percent down payment will reduce it to 1.25 percent."

You haven't told us the purchase price of the house, but if you put down 10% you will save $900 per $100k.

It doesn't look like you get any more benefit by putting more than 10% down, besides a lower monthly (and interest saved on it).

[lilactree]

This info is helpful to me, too. Thank you!

[Drifterrider]

Hello Mustachians! I've been reading the blog and forum for years but this is my first unresolved dilemma!



We have liquid assets of about 75% of the home price, so if the home price drops quickly and we have to bail out for some reason (underwater mortgage), we *could* sell assets to cover the difference, so I don't really think we need the equity cushion.

Intuitively, I think that it makes sense to use the VA loan and finance the entire home outright, investing the down payment in Vanguard (taxed accounts, assuming 401k is full either way). Am I missing something? Thanks!

You are missing something big.  "Underwater" in an invented term to justify not paying bills.

You don't sell your home because it is "underwater" unless it is really Under water (flooded). 

Were you thinking of selling at a loss so you can buy something else???  THAT is foolish.

If you don't plan to stay at least five years, buying is usually a bad choice (situations vary)
ALWAYS use OPM (Other People's Money) if you can do it for free.  Your VA funding fee will be based on the loan value.  You can reduce the amount (in $$) with a down payment but if you have a good enough down payment you can usually get a better rate on a conventional loan.  The benefit of a VA loan is no down payment required and no PMI (but you have the funding fee). 

You might guess "Underwater" is a peeve of mine.  That is like saying you need to sell your car while it is "worth something".  It is always worth something:  more if it operates correctly.

If you chose to buy, compare all the numbers (types of loans, cost of loans, etc).  THEN, decide what type of mortgage is the better deal for you.  Credit unions generally offer better terms than banks and mortgage companies.  Shop around.