VA Loan vs Conventional: The Real Cost of 0% Down
What the VA loan actually gives you
A VA-backed purchase loan offers three headline benefits: zero required down payment, no private mortgage insurance (PMI) ever, and typically lower interest rates than comparable conventional loans because the VA guaranty reduces lender risk. Those are genuine, valuable perks — PMI alone can cost 0.5% to 1.5% of the loan per year on a low-down-payment conventional mortgage, and eliminating it saves thousands.
In exchange, most borrowers pay a one-time VA funding fee. For a first-time use with 0% down it is 2.15% of the loan (rising to 3.3% on subsequent uses); putting 5% down drops it to 1.5%, and 10% or more drops it to 1.25%. Veterans receiving VA disability compensation are exempt from the funding fee entirely — a large enough carve-out that it flips the math for many.
The hidden cost of financing 100%
The subtle cost of 0% down is not a fee at all — it is that you are borrowing the entire purchase price and paying interest on all of it. On a $350,000 home, a conventional buyer putting 20% down borrows $280,000; the VA buyer borrows the full $350,000 plus a financed funding fee. That is roughly $77,500 more principal accruing interest for up to 30 years. At 6.5% that difference alone adds meaningful interest over the life of the loan.
The trade is liquidity for interest. You keep the $70,000 you would have put down — money you can invest, keep as an emergency fund, or use during the chaos of a PCS move. Whether that is worth the extra interest depends on what you do with the cash. Run your own numbers through our VA loan true-cost calculator, which layers the funding fee, the no-PMI savings, and the interest on the larger balance into a single lifetime figure versus a conventional loan.
A full worked comparison
Here is a like-for-like comparison on a $350,000 home, 30-year fixed, 6.5% rate. The conventional case assumes 5% down with PMI until 20% equity is reached (about 9 years); the VA case assumes 0% down, a financed 2.15% funding fee, and no PMI.
| Line item | Conventional (5% down) | VA (0% down) |
|---|---|---|
| Down payment (cash at closing) | $17,500 | $0 |
| Loan amount | $332,500 | $357,525 (incl. fee) |
| Funding fee | $0 | $7,525 (financed) |
| PMI (approx. total until 20% equity) | ~$11,000 | $0 |
| Monthly principal & interest | $2,102 | $2,260 |
| Cash needed to close | ~$17,500 + costs | ~$0 + costs |
| Total interest over 30 yrs | ~$424,000 | ~$456,000 |
The VA loan costs roughly $32,000 more in lifetime interest plus the $7,525 funding fee, but it required $17,500 less cash up front and saved ~$11,000 in PMI. If you invested that freed-up cash at even a modest return, or if you are funding-fee exempt due to a disability rating, the VA loan often comes out ahead on a true total-cost basis.
When conventional actually wins
Conventional beats VA when you have 20% or more to put down (no PMI on either, and the conventional buyer avoids the funding fee entirely while borrowing less), when you plan to stay in the home long enough for the extra interest on the larger VA balance to overtake the up-front savings, or when you want to preserve your VA entitlement for a future purchase. The funding fee is the swing factor: pay it out of pocket in cash rather than financing it and you avoid paying interest on the fee for 30 years.
The buy-vs-rent question comes first
Before any loan comparison, the more fundamental question for a service member is whether to buy at all — because a PCS every two to three years can turn a home purchase into a forced sale at a bad time. Your Basic Allowance for Housing (BAH) is the same whether you rent or buy, so the real decision is whether you will hold the property long enough to overcome closing and selling costs. Our BAH buy-vs-rent calculator compares building equity against renting and pocketing the difference, factoring in your expected time at the duty station. Only once buying clears that bar does the VA-vs-conventional question matter.
Frequently asked questions
Do I have to pay the VA funding fee?
Not always. Veterans receiving VA disability compensation, surviving spouses receiving Dependency and Indemnity Compensation, and certain Purple Heart recipients are exempt from the funding fee. If you are exempt, the VA loan's main cost disappears and it almost always beats a comparable conventional loan. Otherwise the fee ranges from 1.25% to 3.3% of the loan depending on down payment and whether it is your first use.
Can I finance the VA funding fee into the loan?
Yes, and most borrowers do — you can roll the funding fee into the loan balance so you owe nothing extra at closing. The trade-off is that you then pay interest on the fee for the life of the loan. Paying it in cash at closing avoids that interest and is the cheaper long-run choice if you have the funds.
Does a VA loan really have no PMI?
Correct. VA loans never carry private mortgage insurance, regardless of your down payment. This is one of the largest real savings versus a low-down-payment conventional loan, where PMI can add roughly 0.5% to 1.5% of the loan amount per year until you reach 20% equity — often thousands of dollars before it drops off.
Is the VA loan interest rate always lower?
VA loans usually carry rates modestly below comparable conventional rates because the VA guaranty lowers lender risk, but this varies by lender and market. The rate advantage is real but not guaranteed, so always compare quotes. Even a quarter-point lower rate compounds into meaningful savings over 30 years on a six-figure balance.
Can I use a VA loan more than once?
Yes. Your VA entitlement can be restored and reused after you sell a home and pay off the prior VA loan, and you can sometimes hold two VA loans at once using remaining entitlement. Note the funding fee is higher on subsequent uses (up to 3.3% with 0% down), so second-time buyers should weigh a larger down payment to reduce it.
What happens to my VA loan if I get PCS orders?
VA loans have an occupancy requirement — you generally must intend to live in the home. If you receive PCS orders you can rent the property out, and in some cases sell or use a VA loan assumption where a qualified buyer takes over your loan. Because frequent moves are common, the buy-vs-rent decision matters more for service members than for most buyers.
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