April 2, 2021
Why choose a VA Loan?
You probably know there are significant advantages to VA loans compared to other types of mortgages. One of the most popular benefits is that VA loans do not always require a down payment. That allows you to purchase a home with less cash upfront. Also, VA loans have attractive low-interest rates. With all these significant advantages, you might have another question: Who sets the rates? The Department of Veterans Affairs (VA) or the lender?
Who sets VA rates?
The VA does not set VA loan rates. The lenders set the rates based on the market. Although lenders can set their own VA loan rates, market factors — like competition — often keep the rates similar between different lenders. However, you can typically find better rates when working with a credit union. That's because credit unions are not for profit, while banks are for profit.
If you are shopping around, be sure to get quoted rates in writing. That way, you can ensure you're comparing similar offerings between lenders. Sometimes a lender might quote a lower rate, but that may include you having to "buy the rate down" — also known as paying a discount point or two. For reference, one discount point is equal to one percent of the loan.
As an example, imagine you were quoted these rates on a VA loan of $350,000:
- Lender A: 3.1%
- Lender B: 2.8% (with paying two discount points)
The 2.8% sounds more attractive on the surface, and maybe over the life of the loan, it is.
However, paying two discount points on a $350,000 loan costs $7,000. You would have to weigh if having a lower rate is worth adding $7,000 to closing costs.
If you're planning on staying in your home for years, paying points could be a smart financial decision. And, if your goal is to reduce your rate as low as possible, most lenders will allow you to pay points at closing to reduce the interest rate.
How are VA loan rates determined?
Various factors will go into determining your quoted VA loan rate. These include:
- Credit Score: Typically, the higher your credit score, the lower your VA loan rate.
- Loan Repayment History: A strong repayment history can help you get a low interest rate.
- Loan Term: The duration of your loan is another factor. The interest on a 15-year loan is usually lower than on a 30-year loan.
- Loan Type: There are many different types of VA loans, including fixed-rate, adjustable-rate mortgage (ARM), larger jumbo loans, and refinance loans.
How do VA loan rates compare?
Overall, VA loan rates are typically lower and depend on factors like credit score and loan type. To get a better handle on rate comparisons, you can use a tool where you plug in different loan types based on your unique answers. With our mortgage calculator, you can get a quote that is specific to your financial needs.
How do you lock in a VA loan rate?
As you begin the mortgage process, your loan officer will likely quote you a VA loan rate. That is a hypothetical quote of your rate if you were under contract and ready to get your mortgage. But you need to understand that rates move with the market. So, they can change — possibly several times — during a single day.
Once you are under a contract to buy a home, you can "lock-in" your rate. Locking in your rate means you tell your mortgage lender you would like to hold the quoted rate. So, even if rates fluctuate before you close, your rate is set and there will be no adjustments.
Because rates can change before you close on your home, if you lock and rates go down, it doesn't matter. You get the rate you locked in. The same is true if rates go higher before you close. In that case, you timed it perfectly and are still locked in at the lower rate.
You want to try and lock at the lowest point, of course. But, no one knows what rates will do. There is no magic way to determine rate fluctuations. It's up to you to settle on a rate you feel good about. And, don't stress once you lock in a rate.
What are the advantages of lenders who specialize in VA loans?
Now you know all about VA loan rates and have the answers to who sets VA rates. Beyond rates, it's smart to work with a lender who specializes in VA loans like PenFed. Our mortgage loan specialists can help you every step of the way. They are here to help confirm your VA eligibility, explain loan options and closing costs. Our professionals can make the mortgage process smooth and stress-free for you.