VA Loan Rates Drop, But How Low Can They Go?
Keeping in line with all home mortgage interest rate trends, Veterans Affairs (VA) Home Mortgage Loans have continued to fall in the early part of 2015 thus far, with experts wondering how low rates can go.
By the end of 2014, interest rates on VA loans were already below 4 percent, according to the December 2014 Ellie Mae origination report, which represented the lowest rates since such data has been tracked. It’s no wonder why most financial experts didn’t anticipate these decreases to continue. But they have.
What’s causing the rates to drop?
Home buyers, no matter the loan type, have been reaping the rewards of these more favorable terms for some time. The fact that VA mortgage rates are strikingly lower than that of FHA and conventional loan programs, however, is giving veterans and members of the military a very appealing borrowing option.
VA loan rates fluctuate along with the rest of the housing market in general, so as other loan types experience drops in rates, so do VA mortgages. Historically, VA rates have been .375 percentage points lower than conventional loan rates.
As for why housing loan rates overall are dropping? Economic and housing experts are still scratching their heads, since these lows were certainly not predicted. It’s all tied into factors like the inflation rate, which is lower than expected, along with a weaker global economy driving people toward safer investments that include mortgage-backed securities.
When more investors around the world put their money in mortgage-backed assets, rates drop. The bottom line is that economic uncertainty usually equates to lower VA mortgage rates.
But the decline can’t go on forever. Now is as good a time as any to lock in a great rate, which is why applications are on the rise. As of the end of January, VA loans comprised over 10 percent of all home loan applications. If you are an active duty service member, a veteran, a reservist or National Guard member, or a surviving spouse, you could be eligible for this unique loan program.
Additional Advantages of VA Loans
Beyond the obvious perk of paying less interest over the life of your home loan, eligible VA borrowers have some distinct advantages over other traditional mortgage borrowers, including FHA. One major benefit directly related to the low rates is the fact that VA mortgages are assumable. That means that if you wish to sell your home, you can essentially transfer the VA financing to the next buyer (provided they meet eligibility requirements).
Having a super low interest rate in the neighborhood of 3.5 percent can end up being a great selling point down the line, especially since rates will likely climb back up by then.
Of course, there are other attractive aspects of VA loans beyond the favorable rates. For starters, there is no down payment required, meaning that a buyer can fully finance a home without any out of pocket costs or years of saving up. Even FHA loans require 3.5 percent down. For those who are struggling to come up with thousands of dollars, a VA loan could help fast track home ownership.
And, VA loan borrowers don’t have to pay PMI (private mortgage insurance) on top of their mortgage payment since loans are backed by the federal government. That alone can reduce monthly payments by hundreds of dollars.
In addition, while credit scores need to be at respectable levels, the Ellie Mae report indicates that the average FICO score on closed VA purchases fell to 701 in December 2014. That indicates an easing up on qualifications, which could help borrowers who have a less-than-stellar credit history.
If you’re considering going the VA loan route, be sure to work with an agent or lender who specializes in VA loans, since the rules are different than traditional mortgage programs. To jumpstart your application, you might want to work on obtaining a Certificate of Eligibility (COE), which is required by lenders to prove that you meet the eligibility requirements for a VA Loan.
The U.S. Department of Veteran Affairs website breaks down the evidence and documents you’ll need to gather to start the process.
Whether or not rates continue to drop remains to be seen, but no expert will dispute the fact that now is an optimal time for prospective homebuyers to start researching their loan options. If you have the military background or affiliation to meet the eligibility, there might be no better option — or lower rate — right now than the VA loan program.