Are VA Loan Rates On The Rise?
The housing market has been red hot for the past few years, and home rises have been skyrocketing around the country.
Home buyers that have worried about affordability point to increasing home prices and mortgage rates as reasons to not buy a home. The total number of applications for mortgages has been decreasing each week with recent applications dropping 0.1% week over week, continuing a trend of home buyers stopping their search.
Surprisingly, VA home buyers have been leaving the market at an even quicker pace than that.
VA loans are often considered to be the top mortgage product available, thanks to their lower mortgage rates and 100% financing. In a housing market where affordability is one of the biggest issues facing buyers, being VA eligible is a huge advantage.
But what’s happening with VA loans, and are VA rates increasing?
Recent VA rate trends
All mortgage rates tend to follow the same trend, although rates associated with different products can vary.
According to mortgage software company Ellie Mae, the average mortgage rate for a closed 30-year loan in July was 4.91%. By comparison, the same rate in July of 2017 was 4.25%. So, it’s no secret that rates have been rising.
The same is happening to VA rates, although VA rates have been lower. The average rate for a closed 30-year VA loan in July was 4.75%, as compared to 4.00% in July last year.
Even though VA rates have been trending upward, they’ve remained at a lower level, which helps keeps homes more affordable for veterans. While rates have been increasing, there are signs that this increase could be slowing.
What moves mortgage rates?
There are a lot of factors that influence mortgage rates, but there are a few big factors at play.
It mostly starts with the Federal Reserve, which has been raising their federal funds rate. The federal funds rate is the rate that banks borrow money from the government. Essentially, it’s the lowest possible level that any type of interest rate can hit. As this rate increases, all other types of interest rate tend to increase.
In the past two years, the Fed has increased the federal funds rate six times by a total of 1.50%. That’s the largest upward change to the rate in over a decade.
The Fed increases their rate, in part, to keep the economy and inflation in check. As the economy grows, inflation tends to creep higher. Lately, the economy has been growing at a healthy pace, and more attention is being paid to inflation.
Investors also see this happening. When the economy is doing poorly, investors move their money to safer investments. Mortgage backed securities (MBS) are among the safest. MBS are collections of mortgages, and since mortgages are routinely paid off by homeowners, they’re safe for investors.
In a weak economy, investors have a high demand for MBS. This causes mortgage lenders to reduce mortgage rates so they can sell as many as possible. In a strong economy, investors move toward riskier investments. Mortgage lenders respond by increasing mortgage rates, including VA rates, to make MBS more valuable.
All of this combined leads to increasing mortgage rates for home buyers. So, in a roundabout way, a strong economy is actually tougher for home buyers.
What will happen to VA rates?
According to Ellie Mae, VA rates have been increasing, but that increase has been slowing down. July’s average rate was 4.75%, and June’s average rate was 4.74%.
The shortage of home buyers coupled with a slowing housing market could be causing this slowdown. While VA home buyers shouldn’t expect mortgage rates to decrease in the near future, they also might not be increasing by a large margin any time soon.
VA rates are already the lowest available, and they seem to have hit a ceiling – for now. VA eligible home buyers can take advantage of this lull in rates and demand. With less competition for homes and the lowest rates on the market, a VA loan could be the perfect tool for securing financing for a home.