Should You Wait for VA Fees to Drop?

By:
Kara Johnson | October 04, 2011

Fees on VA mortgages are going down in six weeks. If you’re a qualifying veteran or servicemember thinking about buying a home or refinancing a current mortgage, should you wait until they do?

A little background: The VA is reducing its funding fees, the upfront fees it charges for home loans, by one-half to three-quarters of a percentage point. So, for example, if you’re a qualifying veteran or active duty member buying your first home, the upfront fee you’d pay to the VA for the loan is being scaled back to 1.40 percent from 2.15 percent currently.
 

How VA calculates fees

 
That’s charged against the total loan amount. So if you’re taking out a $200,000 mortgage, the reduced funding fee would be $2,800, instead of the $4,300 that would be charged currently – a difference of $1,500. Similar changes are in store for qualifying Reserve and National Guard borrowers and repeat VA borrowers as well.
 
Seems like a no-brainer, right? $1,500 is a lot of cash. The question is, how much is it in terms of your mortgage? And what do you risk by waiting until Nov. 17, 2011, when the lower fees take effect?
 
The thing is, you don’t know what interest rates are going to be at that time. If mortgage rates go up by one- to two-tenths of a percentage point – for example, to 4.1 or 4.2 percent on a 30-year loan instead of 4.0 percent currently – it could wipe out your savings.
 

Reduced fees are like discount points

 
Here’s why: in terms of the cost of your mortgage, the reduction in VA fees is kind of like getting discount points on your mortgage. If you’re not familiar with them, discount points are a fee you can pay to reduce the interest rate on your mortgage. Each point costs 1 percent of your loan amount and reduces your interest rate by 0.125-250 percentage points. One point on a $200,000 mortgage would cost $2,000.
 
So if the funding fee is going to be reduced by one-half to three-quarters of a percentage point, that’s like getting credited for one-half to three-quarters of a discount point. In other words, your $1,500 in savings on a $200,000 loan is roughly equivalent to what you would gain or lose by a 0.1-0.2 percent fluctuation in mortgage rates.
 
In other words, a $1,500 saving in fees on a $200,000 mortgage is like getting a 3.8-3.9 percent interest rate instead of 4.0 percent.
 

Where are rates headed in six weeks?

 
Of course, you don’t know what mortgage rates are going to do over the next six weeks. If Nov. 17 arrives and average 30-year rates are 4.2 percent, you’re savings have been effectively wiped out. However, if rates stay the same or fall even further – and the Federal Reserve recently took action to make sure they do – you’ll come out ahead.
 
The new fees will range from as little as 0.50 percent of the loan amount for a qualifying veteran or active-duty first-time homebuyer putting more than 10 percent down to 2.80 percent for a repeat borrower with less than 5 percent down. Reserve and National Guard members typically pay about a quarter of a percentage point more than vets and active duty personnel, and fees are waived for those with service-related disabilities.
 

About VA home loans

 
The fees were originally scheduled to be reduced on Oct. 1 of this year, but Congress pushed it back to Nov. 17. Homebuyers and refinancers who already arranged for mortgages under the assumption the fees were going down will get the lower fees, the VA has said.
 
VA loans can be very attractive for those who qualify because they’re one of the only ways you can still get a zero-down payment mortgage. Private mortgage insurance (PMI) is never required and the upfront fees are tax-deductable as a form of mortgage insurance. Closing costs paid by the borrower are limited and credit is generally easier to obtain than on a conventional mortgage. On the downside, there’s more red tape involved and sellers may demand a higher price in return for being required to pick up more of the closing costs.
 

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