VA mortgages are only available to active duty military and eligible veterans of the armed services. While this type of loan is available to all branches of the military it is restricted to active duty and honorably discharged veterans and does not extend to service members that are dishonorably discharged from service. There are multiple advantages to obtaining a VA loan, one of which can be the interest rate.
The interest rate determination for market value rates is determined by the federal government bond rate. This accounts for market conditions and the amount of loans purchased by the secondary mortgage market, also known as Fannie Mae and Freddie Mac.
Rates are determined primarily by the amount of investors purchasing loans in the primary and secondary markets at any given time. The higher the potential yield for investors, the lower the interest rate becomes for consumers. This not only affects the rates for VA loans, but FHA and other conventional loans as well.
The baseline used to determine VA mortgage rates is based on the current market interest rate. However, states like Texas (for example) offer a program specifically for Texas veterans that reduces the market rate by a quarter of a point off the current market rate.
Adjustable Rate Mortgages
VA loans are eligible for adjustable rate mortgages as well, which can further reduce the interest rate from the market value during the first three to five years of the loan. With an adjustable rate mortgage, the interest rate begins at a few points lower than market value and increases over time to match up with the market rates.
The major advantage of a VA adjustable rate mortgage is higher qualifying ratios up front and lower payment amounts. Since the interest rate will adjust with inflation, this allows the veteran to build equity in the property faster than with a traditional mortgage, which can assist in selling should they need to change duty stations during active service.
Interest Rate Buy Downs
For fixed rate mortgages, VA loans offer a potential to buy down the interest rate. As with the determination for all VA loans, the baseline used is the current market interest rate, but the veteran can use either concessions from the seller that might normally be applied to closing costs to buy down the rate. The veteran also has an option to buy down the rate themselves, resulting in a low, fixed interest rate for the term of 15 to 30 years.
The typical cost of a rate buy down is $1,000 for every quarter point. For example, if the market rate of a 30-year fixed rate mortgage is 5.25 percent, a payment of $1,000 reduces the rate to 5 percent for the duration of the loan.
Similar to an adjustable rate mortgage, the interest rate buy down allows the veteran to build equity faster by having a lower rate of interest during the term of the loan. The major difference being that the interest rate will not adjust over time, but the cost of a permanent buy down could be more expensive than an adjustable rate option.
Interest rates fluctuate on a regular basis. They can fluctuate by up to a point from one week to the next. Since rates are unpredictable, there is no way of knowing when rates will go up or go down. When looking to purchase a home using a VA loan, should interest rates be higher, the veteran does have an option to refinance the property when rates go down. Regardless of whether or not the property was financed using an adjustable rate or fixed rate loan, there is always an option to lower the rate by refinancing.
Since VA loans come with the advantage of the buyer not having to pay monthly mortgage insurance as they would with FHA or VA loans, this can make for a substantially lower payment. Because many state programs offer resources to make the interest rate lower than market standard rates it is wise to consult a loan officer to discuss the best loan products available to eligible military veterans.