If you are an active-duty or veteran military service person, VA home loans are an incredible home loan option; the fees are low, no down payment is required, and there is technically no minimum credit score bar to clear. In fact, 90% of VA loans are made without a down payment. You might wonder if these great terms come with a trade-off in high mortgage interest rates. The good news is that VA loan rates are often even lower than conventional mortgage rates.
What Are VA Loans?
VA loans are mortgages backed by the Department of Veteran Affairs. They are actually made by private mortgage banks and lenders but guaranteed by the VA. This means that if the borrower were to default on the loan, the VA would repay the lender for the loss. This sponsorship dramatically lowers the risk that lenders take on when making these loans, allowing them to offer more competitive interest rates.
How Low Are VA Rates Compared to Other Loans?
There is plenty of data to prove that VA loan rates have a great track record compared to other common mortgage loans. According to Ellie Mae Origination Insight Reports, average rates on 30-year VA loans have been consistently lower than conventional and FHA every month since the company began including VA loans in its report in November 2014.
The reports also found that VA loan rates ranged anywhere from 0.25 to 0.42 basis points lower than conventional home loans. Over the course of 30 years, that small difference in interest rate can result in thousands of dollars of mortgage savings. For example, a conventional $300,000 loan with an interest rate of 7% would cost $419,307 in interest payments. A $300,000 VA loan with an interest rate of 6.6% (0.4 points lower than the conventional), would only cost $390,501, a savings of almost $30,000 over the course of the loan. These savings would also be reflected in smaller chunks in your monthly payment as well.
How Do Other VA Loan Costs Compare?
Another nice feature about VA loans is that the Department of Veteran Affairs only allows lenders to charge for certain things. These include:
- VA Funding Fee – this is a one-time fee of 2.14% of the loan amount for first-time borrowers. It is collected by the lender and passed on to the VA to cover its costs for administering the loan program. It can be rolled into the total balance of the loan, but borrowers will save money in the long run by paying it upfront. There are exemptions from this fee for certain disabled Veterans and most Surviving Spouses.
- Origination Fee – for VA loans lenders can only charge up to 1% of the loan total for their origination costs.
- Reasonable Discount Points – each discount point is equal to 1% of the loan total and can be paid to further buy down the interest rate.
- VA Appraisal Fee - VA appraisals typically cost more because they require a more thorough report of the property than a conventional appraisal.
- Credit Report Fee - the credit report fee for a VA Loan is generally comparable to any other mortgage loan type.
- Prepaid Escrow Fees – these include the upfront costs for property taxes and homeowners’ insurance.
- Additional Closing Costs – these might include title insurance fees, recording fees, and other typical costs for finalizing the mortgage.
In a buyer’s market, VA loan borrowers can even ask sellers to pay for many of these VA loan fees. Legally, sellers can pay for all the borrower’s closing costs and up to 4% in concessions.
VA mortgages in general have lower interest rates and fees than other popular loans. It’s one way to say thank you to all those who have served and sacrificed for our country.
If you're interested in discussing a VA Loan, please give us a call today!