Are you worried about the interest rate on your mortgage? If so, you aren’t alone. The interest rate is the detail most focused on in any loan origination. While we don’t agree that you should focus solely on the rate you are being charged, there is something to be said about finding the lowest rate available.
Veterans often wonder if their interest rates are lower or higher than other loan types. On average, VA rates are competitive with other loans, including conventional loans, which have the lowest rates in most cases. Because the VA guarantees loans for lenders, the lenders are able to pass along low-interest rates that are either comparable to or lower than conventional and FHA interest rates because their risk of total loss is low.
What do Lenders Look At?
What you want to know is how lenders base your interest rate. Don’t get us wrong, you can secure a conventional loan for less than a VA loan and vice versa. It depends on your risk factors. Lenders use what they call ‘risk-based pricing.’ The higher your risk of default, the higher the interest rate a lender may charge – it’s that simple.
So how do lenders determine your risk? They look at the following factors:
- Credit scores – The VA doesn’t require a specific credit score, but lenders will definitely look at the score. The higher your score is, the lower the interest rate a lender may charge. A high credit score usually signifies financial responsibility, which lowers the lender’s risk of default.
- Debt ratios – Again, the VA doesn’t require a maximum debt ratio, but lenders will focus on it. They want to know how much of your money is already ‘taken.’ In other words, what obligations do you already have? The lower that debt ratio is, the lower the interest rate a lender can give you.
- Down payment – VA loans don’t require a down payment, but that doesn’t mean you can’t make one. If you want to gain a little equity right away, you are free to put money down on the home. If you do, you lower the risk of default, which again may prompt a lender to give you a lower interest rate.
Every Lender Differs
Even with the above suggestions to get the best interest rate, each lender will have their own rates. Some lenders don’t offer ‘risk-based pricing.’ They have a set rate for VA loans and that’s what they will give you, even if it’s higher than the competition.
Even the lenders that do adjust rates based on your qualifying factors may have different adjustment thresholds. For example, one lender may give you a 0.5% lower interest rate for your credit score over 700 while another lender may not make any adjustment for the high score. Rates can honestly differ between 0.5% and 1% between lenders.
The best way to make sure you have the best rate available to you is to shop around. Get quotes from no less than three lenders. This way you can compare the loans side-by-side and determine which rate is right for you.
The Lowest Rate Isn’t Always the Best
Make sure you aren’t caught in the trap of just looking at the interest rate. You want to look at the big picture – this means the APR. The APR takes into consideration the cost of taking out the loan. It annualizes the interest rate so that you can see the true cost of the loan.
If you take the loan with the lowest interest rate and don’t look at the cost of the loan over its lifetime, you could end up with a higher APR, which costs you more in the end.
We understand wanting the lowest interest rate on your VA loan, but make sure you look at all of the details. Sometimes the VA loan won’t have the lowest rate. If you have a down payment, it’s worth checking out the available interest rates on other loans, such as the conventional loan to see if you can save money in the long run.