How does my down payment affect my interest rate? We’re going to go over down payments and if—and how—they can affect your interest rate on your home loan, whether you’re purchasing a home or doing a refinance. We’ll look at how much equity you’re keeping in the home and how it can impact the loan terms you might receive. We’ll be focusing on conventional loans and what we specialize in: VA loans.

So, do down payments impact interest rates in the first place?

Well, it really depends on the loan type and your lender. Let’s start by looking at conventional loans.

With conventional loans, down payments now can affect your mortgage interest rate. This is a significant change that happened last year when new “Loan Level Pricing Adjustments” (LLPAs) were introduced. Now, when we look at rates, the matrix includes down payment as a factor, and there’s a drastic impact on interest rates. We have a few videos on this topic from last year if you’d like more detail, but the basics are that if you put more money down, there’s typically going to be less of a loan-level pricing adjustment—meaning less of a penalty on your interest rate.

There’s a bit of a caveat here: they modified the system so that if you put the lowest amount down, you also face fewer restrictions. The idea is to help incentivize people who have less money to put down, so they don’t get penalized as heavily. Essentially, people who get hurt the most are usually those who fall somewhere in between the high and low down payment amounts. That’s why it’s crucial—if you’re considering a conventional loan—to run different scenarios with your loan officer (ideally one of us) to understand the adjustments. We can look at 5% down versus 15% or 20% down, because these scenarios can really impact the rate on conventional loans.

Now let’s turn to VA loans, which is our primary focus. VA loans make up 70% of our business with active duty military. In the case of VA loans, down payment makes no difference at all. Whether you put 0% down or 50% down, your interest rate remains the same. This is a common question: “If I put more money down, will that impact my interest rate on my VA loan?” With VA loans, the answer is no, unlike conventional loans where down payment does matter.

Why is that? Well, the VA guarantees the loan no matter the down payment. The VA home loan guarantee doesn’t mean the VA funds VA loans—people sometimes assume that. Instead, the VA offers a guarantee to us, the lenders, similar to an insurance policy. Essentially, they say, “If your company funds Johnny’s loan and he defaults, we’ll cover about 25% of the loss.” There are some technical details here, but basically, the VA covers 25% of losses on VA loans in case of major issues, regardless of down payment. This reduces lender risk, keeping the rate stable. So, while a conventional loan depends on your down payment, a VA loan doesn’t reflect any difference in mortgage rates based on your down payment.

This is one of the great advantages of a VA loan, especially if you’re putting little money down. For those who want to put a lot of money down, we sometimes compare a VA loan to a conventional one to see if conventional might offer a slight edge. It usually doesn’t, unless multiple factors are combined, like high credit, high down payment, and avoiding the VA funding fee—conditions that might favor a conventional loan.

In summary, down payments can impact your interest rate if you’re dealing with conventional loans or other types of loans. However, with a VA loan, it doesn’t make a difference to your mortgage interest rate whether you put more or less money down. Although credit score can affect it somewhat, down payment doesn’t play a role.

My name’s Evan Kaufman, your VA originator. I hope this helps explain how down payments can affect your rate. Take care—bye!