APR Rules for a VA Home Loan

More than 27 million veterans of the U.S. armed forces are eligible to take advantage of special VA financing to purchase or refinance their homes. Like other home loans, VA loans are made by private lenders like mortgage companies and banks. Agents at these private lending institutions are qualified to offer eligible veterans unique financing incentives that result in lower APRs.

Demystifying APR

APR stands for "annual percentage rate," and is designed to help buyers determine the true cost of borrowing money for a house. The APR formula was created by the government, and its calculations factor in the loan's interest rate and other costs like the origination fee, points, closing costs, mortgage insurance, etc. Because of the added figures the APR precentage is always higher than the interest rate quoted on a loan.

APR is designed to give buyers a way to compare "apples to apples" when shopping around for mortgage lenders when the rates, points and costs being offered differ from lender to lender.

VA Loan APR Advantages

The benefits of a VA loan for veterans are considerable--and although their are no special VA APRs, many of the figures that go into calculating the APR are subject to VA discounts, which will ultimately lower the APR. VA mortgage loan benefits include no down payment in most cases, a high probability that lenders will offer discounted interest rates to vets, the elimination of mortgage insurance requirements, and limits on the amount of closing costs that can be paid by a vet.

These discounted figures all factor into the government's formula for calculating APR, the result of which is a lower APR for vets.

Shop Around for the Best Deals on VA Loans

Veterans should still shop around to get the best deal on interest rates, closing costs, points, etc. Since many lenders offer VA loans, the competition is as steep for VA loans as it is for other home mortgage loans. Look for a mortgage lender that best meets your needs for purchasing real estate.

VA Refinancing and APRs

The VA streamline refinance home loan, also referred to as an IRRRL (Interest Rate Reduction Refinancing Loan) or "VA to VA," is a government-backed mortgage loan for those with an existing VA loan. IRRRLs offer no out-of-pocket costs to the buyer by rolling the loan costs in at an interest rate that enables the lender to pay them so you don't have to. Because the many loan costs are mostly eliminated with VA Streamline loans, APRs are lower for vets. And because the APR calculations that apply to all other mortgages apply to VA Streamline loans, vets should continue to use APRs to help them shop around for the best loan terms.

Limits on VA ARM loans result in lower APRs

VA traditional and hybrid loans offer much better terms than their non-VA counterparts. This is because the VA is authorized to guarantee better rates.

Right now VA hybrid ARMs remain fixed for the first 3 years. After that, annual adjustments can't be greater than 1 percent if the fixed-rate period is less than 5 years, and 2 percent if the fixed-rate period is more than 5 years. With traditional ARM loans the VA guarantees that the annual adjustments on 1-year ARM loans cannot be greater than 1 percent with the maximum interest rate over the life of the loan being 5 percent.

Resources

• U.S, Dept of Veterans Affairs-- Home Loan FAQs