No Cost Loan!
No-Cost VA Loan!
Want to take advantage of lower rates without adding thousands of dollars in closing costs to your new loan?
A no-cost VA loan option may allow eligible closing costs to be covered through lender credits instead of being paid out of pocket or added to your mortgage balance.
What Is a No-Cost VA Loan?
Every mortgage has costs associated with originating and closing the loan. A "no-cost" or "no-closing-cost" VA loan does not mean those expenses disappear.
The tradeoff is usually a slightly higher interest rate than the rate available if you paid the closing costs yourself.
This can create an attractive option for Veterans who want to lower their existing mortgage rate or payment but do not want to write a large check at closing or add thousands of dollars of costs to their new loan balance.
3 Ways VA Loan Closing Costs May Be Handled
1. Lender Credit / Premium Pricing
Instead of selecting the absolute lowest available interest rate, you may choose a slightly higher rate.
That rate may generate a lender credit that can be applied toward eligible loan closing costs.
This is one of the primary ways a VA refinance may be structured as a no-cost loan.
2. Finance Allowable Refinance Costs
With a VA Interest Rate Reduction Refinance Loan (IRRRL), allowable closing costs may generally be included in the new loan rather than paid in cash.
This lowers the amount needed at closing, but it increases the amount financed.
3. Seller or Builder Credits
When purchasing a home, a seller or builder may agree to pay eligible closing costs.
This can substantially reduce the amount a Veteran needs to bring to closing.
VA Funding Fee
Veterans who are not exempt from the VA funding fee may generally finance the funding fee into their VA loan instead of paying it in cash.
Some Veterans are exempt from the funding fee altogether.
Why Would Anyone Choose a Slightly Higher Rate?
At first, choosing anything other than the lowest available rate may sound backwards.
But the lowest rate does not always produce the lowest cost over the period of time you actually keep the mortgage.
If you expect to sell the home, refinance again, pay the loan off, or otherwise replace the mortgage before reaching that break-even point, paying thousands of dollars upfront for the lower rate may not provide enough time to recover the cost.
Example: Lower Rate vs. No-Cost Option
Here is a simplified example using a $400,000, 30-year fixed-rate loan. These rates and lender credits are hypothetical and are used only to demonstrate how the strategy works.
Illustrative example only.
Assumes lender credit is sufficient to offset the illustrated eligible costs.
Example assumes a $400,000 30-year fixed loan, approximately $4,000 of eligible costs and an illustrative payment difference of about $64 per month. This simplified comparison does not account for differences in principal amortization, taxes, insurance, escrow balances, prepaid interest, tax consequences, funding fees or other transaction-specific costs. Actual interest rates and lender credits vary by borrower, lender and market conditions.
When a No-Cost VA Refinance May Be Worth Considering
but do not want to spend thousands of dollars to refinance.
by financing closing costs into the new mortgage.
You might move, refinance again, or pay the mortgage off before reaching the break-even point of paying closing costs upfront.
You would rather keep your available cash for savings, emergencies, investments, home improvements, or other needs.
You would like to benefit from today's refinance opportunity without feeling like you must keep the new loan for many years just to recover the closing costs.
When Paying Closing Costs for a Lower Rate May Make More Sense
A no-cost structure is not automatically the right choice for every Veteran.
If you expect to keep the mortgage for many years, paying eligible closing costs upfront in exchange for a lower interest rate may eventually produce a lower total borrowing cost.
That is why the most useful comparison is not simply:
Instead, compare:
- The interest rate
- The lender credit or points
- Total closing costs
- Cash needed at closing
- New loan balance
- Monthly principal and interest payment
- Break-even period
- How long you realistically expect to keep the loan
No-Cost VA Streamline Refinance (IRRRL)
Veterans who already have a VA-backed mortgage may be eligible for a VA Interest Rate Reduction Refinance Loan, commonly called a VA Streamline or IRRRL.
VA rules specifically permit an IRRRL to be structured with no money out of pocket by either:
- Including allowable closing costs in the new VA loan, or
- Selecting an interest rate that provides sufficient lender credit for the lender to pay eligible closing costs.
Ask about a lender-credit option. In some situations, accepting a slightly higher rate may allow eligible costs to be covered without substantially increasing the new loan balance.
Can You Do a No-Cost VA Purchase Loan?
A VA purchase loan works differently from an IRRRL.
With a VA purchase loan, ordinary closing costs generally cannot simply be added to the VA loan balance. The VA funding fee is the primary fee that may be financed into the loan.
However, there are still several ways to substantially reduce the amount of cash required at closing:
- Lender credits
- Seller-paid allowable closing costs
- Builder credits
- Negotiated seller concessions where permitted
- VA funding-fee exemption for qualifying Veterans
- Financing the VA funding fee when applicable
Even when lender credits cover eligible loan closing costs, a borrower may still have amounts due for items such as prepaid interest, property taxes, homeowners insurance, escrow funding, payoff adjustments or other transaction-specific items.
Your Loan Estimate and Closing Disclosure show the actual charges, credits and estimated cash required for your individual transaction.
Don't Compare Just One VA Rate.
Ask us to show you both options side by side: the lower-rate option and the no-cost lender-credit option. Then you can see the payment, closing costs and break-even point before deciding which structure makes the most sense for you.
The Bottom Line
If rates have dropped enough to improve your mortgage, you do not necessarily have to choose between doing nothing and paying thousands of dollars in closing costs.
A properly structured no-cost VA refinance may provide another option: use lender credits to offset eligible closing costs while still taking advantage of a lower rate than your existing mortgage.
The right structure depends on your current mortgage, available rates, lender pricing, how long you expect to keep the loan and your individual financial goals.
U.S. Department of Veterans Affairs — VA Interest Rate Reduction Refinance Loan
U.S. Department of Veterans Affairs — VA Funding Fee and Loan Closing Costs
Consumer Financial Protection Bureau — Lender Credits and Discount Points
Disclosure: This information is for educational purposes only and is not a commitment to lend or a guarantee of any particular interest rate, lender credit, payment, loan amount, qualification or closing cost. Interest rates, lender credits and loan terms vary based on market conditions, borrower qualifications, property characteristics and lender requirements. Illustrations shown above are hypothetical. VA loan eligibility and refinance requirements apply.