VA Interest Rates vs. Conventional Interest Rates
This is the ever-changing, elusive question that borrowers often ask and rarely get a straight answer to. In this article, we’re going to do our best to paint a very clear picture of how VA loan interest rates generally compare to conventional interest rates. We’re going to show actual data provided by Ellie Mae, and we’re going to talk about the general rule of thumb you can follow, and then we’re going to talk about the difference between rate and APR and how the Funding Fee plays into all of this.
From May of last year through May of this year, VA interest rates were consistently lower than Conventional interest rates. On average, in that time frame, VA interest rates were 0.32% lower than conventional interest rates. There were times that they were even lower than that and there were times that offered rates were closer. Generally speaking, when rates go up, conventional rates go up faster than VA rates do, and when rates go down, conventional go down faster than VA rates do. This is illustrated by the data, in that the higher rates are generally, the larger the gap between the VA rates and the Conventional rates, and the lower that rates generally are, the more Conventional begins to close the gap. This is because there’s only so low that rates will ever go, and as conventional rates get closer to that point, they begin to close the gap with the VA rates.
The Rule of Thumb
Generally speaking, the rule of thumb is that you can expect interest rate offers between 0.5% and 1.0% lower on a VA loan than on a conventional, though you likely won’t see that big of a difference until interest rates are generally higher than they are currently. This difference exists primarily because of the VA guarantee. The VA guarantees (usually) 25% of the loan amount to the lender, which takes away a good portion of the risk that they are taking on, particularly with a borrower with less-than-perfect credit that is not making a down payment. However, the VA is not guaranteeing 100% of the loan amount, so that risk is not completely gone; it’s just mitigated. This is why interest rates aren’t constantly sitting at absurdly low amounts on VA loans.
It’s important not to use this rule of thumb to create unreasonable expectations, however. As you saw in the data in the first paragraph, the gap between conventional and VA loans hasn’t been as big as 0.5% in the last year and a half, so just because a VA lender doesn’t offer you that much lower of a rate does not mean you’re getting a bad deal or the lender is trying to cheat you. Hopefully, you’re getting quotes from multiple lenders, so you’ll be able to see whether the rate that one lender is offering you is a good rate. Use the actual average mentioned in the above paragraph, along with the explanation of how rates generally move, coupled with the rule of thumb to make an educated guess on what you should expect for rates as you make plans to purchase a house.
We’re Not Talking About APR
It’s important to note that these are just interest rates. While interest rates make up the majority of APR, other things (such as discount points) also add to APR. Something to consider is the requirement of the VA Funding Fee, which can add thousands of dollars to the amount the loan costs you to get, and thus increase the APR, which is what you really want to compare across the board. For example, if you got a mortgage for $200,000 and paid the standard VA Funding Fee of 2.15%, you’d pay $4,300. If the interest rate was 4.0%, and no other factors were added in, your APR would be 4.1830%, which is still lower than you’d be offered on a conventional loan using the average from the last year and a half (conventional would be 4.32% interest, plus other fees that would push the APR higher).
VA interest rates and APRs are generally lower than Conventional. How much lower depends on market factors and your own credit and income qualifications for the loan you’re getting. Many critics of the VA loan program claim that the Funding Fee makes the VA loan less affordable than a conventional, but we have shown, using actual numbers, that this is not the case. Contact us today for more information.