VA Loans Interest Rates Benefits
- Lower rates = lower monthly payments = higher loan amount
- Less dependent on credit score and down payment/home equity
- Lower compared to conventional mortgage programs
Shopping For The Best VA Mortgage Rates
The VA puts rules and limits in place to keep VA loan rates lower than those found in other loan types, like FHA and conventional loans. But it’s important to understand that, ultimately, the rates on VA loans are set by larger forces in the market and not by the VA.
How Are VA Loan Rates Determined?
Mortgage rates are at all-time lows, according to the Freddie Mac Rate Trends Survey, which has been released on a monthly basis since 1971.
By putting caps on rates, fees, and closing costs that lenders can charge to veterans for risk adjustments based on LTV (loan-to-value), credit and other factors under the VA Loan program, the VA keeps lenders from charging excessive fees and interest that might keep them from being able to buy a home. But both lenders and the VA have very little control when it comes to controlling mortgage rates on VA loans. Here are some key terms to know as you try to understand all of the forces that affect the interest rate on your VA loan.
As a borrower, it’s crucial that you understand the concept of a lock period. In general, longer periods—which can be 15, 20, 30, 45, or 60 days—mean higher interest rates for the borrower. Ideally, borrowers will wait until loan pre-approval before they select the lock period that best fits their needs. Sometimes, lenders insist that borrowers get written approval for their loan before locking in a lower interest rate.
Interest rates are heavily influenced by economic forces, especially inflation, which represents the amount that the costs for goods or services go up over time. When the cost for goods and services rises, mortgage rates typically follow. When inflation rates go down, rates tend to fall as well.
The Federal Reserve
Overseeing monetary policy for the U.S., the Federal Reserve serves as an investor in the market, aiding the economy in speeding up or helping it slow down, as needed. Action by the Federal Reserve to speed up the economy—such as reducing interest rates—can directly reduce interest rates on VA loans. The opposite is also true: when the Federal Reserve raises rates, VA loan rates often follow.
Gross Domestic Product (GDP)
One of the key measures of government spending and national economic health, the GDP often has a direct effect on VA loan rates. A high GDP usually precedes an increase in VA loan rates. Conversely, low GDP often signals that low rates are coming to encourage consumers to borrow more and spend more to get the economy moving.
One major economic force that influences VA loan rates is unemployment, or how many people who could be working are out of work. High unemployment usually signals a slow economy, which means interest rates will likely be lowered to get things moving again. The opposite is also true: as more people go back to work and the economy improves, loan interest rates go back up.
Because the economies of the world are all interconnected, events like wars, natural disasters, and humanitarian crises can have a significant impact on energy prices and economic stability, which in turn reduces the amount of disposable income in the economy. Even the anxiety produced by these events can cause consumer spending to slow down and more money to be put away for a rainy day. All of this typically leads to lower mortgage rates.
The Secondary Market
In the lending market, a group of investors—known as the secondary market—purchases the loans that originate at financial institutions and local banks. They then hold on to these loans and depend on the interest from these loans to realize an increase on their initial investment. Oftentimes, they will bundle these loans together and sell them to other investors.
These bundled loans often find their way to buyers, who pay a certain price for the product, which is then called Mortgage Backed Securities (MBS)—securities that are backed by an individual mortgage. Most investors are usually happy to take a lower return on an MBS because these loans are viewed as a safe place to store money. Risk is also lower with MBS products because they’re federally operated by organizations Fannie Mae or Freddie Mac. An MBS is also lower risk because it’s backed by the value of the real estate that is secured by the mortgage.
The Bottom Line
GDP, the Federal Reserve, inflation, the secondary market, geopolitical issues, and the unemployment rate are a few of the factors that impact the mortgage rates on your VA loan. These factors can cause you to pay more or less per month, even though your loan amount is the same. Ultimately, neither the VA nor lenders are responsible for setting interest rates, which are simply reacting to larger market conditions.