VA Loan Rates

Understanding VA Loan Rates

A low interest rate is one of the many benefits VA loans provide when purchasing a home. Just a fraction of a percentage point on the interest you pay can make a huge financial difference over the life of a loan.

VA loans are available to military members, veterans, and spouses through the Department of Veterans Affairs. The VA doesn’t set interest rates on home purchase loans, mortgage lenders do. Because the VA guarantees the loan, VA loan rates are consistently lower than conventional rates.

VA loan rates vs. conventional loan rates are “exceptionally competitive,” John Bell, acting executive director of the Department of Veterans Affairs Loan Guaranty Service said in an interview with the National Association of Realtors. “In most cases, VA is the lowest interest rate for veterans.”

How Are VA Loan Rates Calculated?

VA loan rates are calculated the same way a conventional loan rate is with one very important twist that favors VA borrowers – the VA guarantees its loans, meaning if the borrower defaults, the VA will step in and pay off the loan.

That has a huge impact on what your interest rate will be.

Otherwise, the calculating methods are identical. Lenders for either VA or conventional loans consider your credit score, how much debt you have vs. income, your credit history, down payment, whether the loan is for 15 or 30 years, and the location of the home.

Other factors that can figure into the final rate include how hot the market is for loans; inflation’s impact on home buying; and supply and demand for houses.

Lenders weigh these components to determine how big of a risk they’re taking by giving you a loan. If you want to be considered a good risk, the best advice is to have a history of paying on time and paying in full.

Are VA Loan Rates Lower Than Conventional Mortgage Rates?

VA loan rates are almost always lower than conventional mortgage rates because the VA guarantees the loan, meaning if you default, the VA will pay it. That eases the risk factor considerably, so lenders are comfortable reducing the rate.

Depending on the lender, the difference in the interest rate on a VA loan and conventional loan could be as much as 1%. That’s a substantial savings, but even a quarter percentage point makes a big difference over the life of a 30-year loan.

As an example, you’re buying a $250,000 home and not making a down payment, which is another benefit of a VA loan. Let’s say the interest rate on your 30-year VA loan is 6.75%. That means the monthly payment is $1,621. (This does not include home insurance or property taxes, which likely will be part of your payment, as well as the VA funding fee. More on that later).

If you were to get a loan just one-quarter of a point higher (7%), your monthly payment would be $1,663, or $42 a month higher. If the rate were a half-point higher (7.25%), your monthly payment would be $1,705, a jump of $84 a month.

Another advantage of VA loans over convention loans is that private mortgage insurance (PMI) is not required on VA loans. With a conventional loan, you must have a 20% down payment or you have to pay PMI, which can add up to 2.25% to your monthly payment.

The VA Funding Fee

Most borrowers pay a funding fee for VA loans based on the amount of their down payment It’s 2.15% for a down payment of less than 5%. It drops to 1.5% for a down payment of 5% or more, and 1.25% if you come up with a down payment of 10% or more. You can pay the fee at closing or roll it into your loan, which increases the monthly payment.

The funding fee for a VA Native American Direct Loan (NADL) is 1.25%, regardless of down payment amount.

Native American Direct Loan (NADL) Interest Rate

The VA’s only direct loan is the NADL, with an interest rate of 2.5%. To be eligible, a veteran, service member, or their spouse must be Native American. NADL borrowers who closed before March 13, 2023, with an interest rate above 3.5% can refinance for 2.5%. The loan must be used to buy, build, or improve a home on federal trust land.

VA Loan Purchase Rates vs. Refinance Rates

If you get a VA loan to refinance your home, the interest rate won’t vary greatly from those for purchase loans, but the amount you pay a month may. This is because of the APR (annual percentage rate), which is the interest rate as well as other fees and costs associated with paying your mortgage. For instance, the funding fee may have influence on what your APR is if you roll it into the loan.

There are two kinds of VA refinancing loans:

VA cash-out refinance loans can be used replace a non-VA loan with a VA loan, or to take cash out of the equity on a home to use for debt consolidation, home repairs, or anything else the borrower needs it for. VA cash-out refinance loans come with a funding fee of 2.15% for first-time borrowers and 3.3% if it’s not your first VA loan.

VA Interest Rate Reduction Refinance Loans (IRRLs), often called a VA streamline refinance, are for borrowers who already have a VA loan and want to reduce their monthly payment with a lower interest rate. Borrowers will take out a new loan that replaces the current one, but no down payment is required, and the funding fee is only 0.5%, whether it’s your first VA loan or not. The funding fee to refinance an NADL is also 0.5%.

If you don’t want the funding fee to increase your monthly payment, pay it in full at the loan closing.

The VA cautions borrowers to do their homework when they’re refinancing their VA loan. If the offer says you can skip payments or get very low interest rates or other terms that sound too good to be true, it may be signs of a misleading offer.

How to Get the Best VA Loan Rate

To get the best VA loan rate you possibly can:

• Improve your credit score. The higher your credit score, the better your rate.
• Reduce the amount of debt you have. The lower your debt-to-income ratio (DTI), the better rate the bank will give you. Lenders like to see a DTI under 36%, but the lower, the better.
• Make a down payment, even though you don’t have to. This will decrease the amount of the funding fee, decrease the amount you borrow, which often means a lower interest rate, and decrease the amount you pay overall.
• Don’t bust the budget. Just because you are approved for a certain amount, doesn’t mean you have to buy the most expensive home you can afford. The lower the mortgage, the less impact it will have on your finances and the better rate lenders will offer.
• If you can afford a 15-year loan instead of a 30-year loan, your interest rate will be lower, and you’ll pay much less overall.
• Shop around for a lender. Do your homework and find a lender who offers a competitive rate.

Can You Buy Down the Interest Rate on a VA Loan?

You can buy down the interest rate on any VA loan – a purchase loan, cash-out refinancing, or IRRL – either for the life of the loan or temporarily.

A buydown, or discount points, on a VA loan is often used by mortgage lenders or sellers as incentive to buyers. Don’t expect to see it from sellers in a seller’s market, though. In most cases, the buyer pays the discount points. The longer you plan to live in the home, the more financial sense a permanent buy-down makes.

Discount points must be approved by the lender and paid at closing. The cost of one point is 1% of the loan, which typically reduces the interest rate by 0.25%. The VA doesn’t have a limit on discount points. The amount is whatever the borrower and lender agree upon. If the VA funding fee is being rolled into the loan, the points must be based on the principal amount of the loan after adding in the fee amount.

Sellers can pay up to 4% of the sales price of a VA loan, but they cannot pay for discount points. Buyers and sellers sometimes negotiate on the seller paying some of the buyer’s closing costs, so the buyer can pay discount points.

The buyer must determine if the move is cost-effective. The longer the buyer stays in the home, the more savings the points will bring. If the buyer plans to only own the home a couple of years, buying discount points likely won’t be cost-effective. Before buying points, figure out where the break-even point is, the point where the cost of the points is paid for by the lower interest rate.

To figure out the break-even point, determine what the principal and interest payment on the mortgage would be at the original rate. Then figure it out at the rate with the discount points. Subtract the smaller monthly payment from the larger one, then divide it into the amount paid for the points. The number you get is how many months it would take to reach the break-even point.

As an example, let’s say your new mortgage is $248,000 with a 6.75% interest rate, meaning a monthly payment of $1,608. You’d like to get the interest rate down to 6.25% and pay $1,526 a month. To do it, you pay $4,960 to get the 0.5% reduction.

The difference in the monthly payments is $82. The $4,960 payment divided by the $82 savings is 61, meaning it will take 61 months, or just a little over five years, before you’ve covered the $4,960. That’s your break-even point.

If you don’t plan on living in the house that long, particularly if you’re active-duty military and may get transferred, it makes more financial sense to pay the higher interest and not the $4,960 upfront for the points. If you plan to live in the house for the life of the mortgage, however, you’ll save a lot of money in the long run. With the initial interest rate, you would pay $579,068 for the 30-year mortgage. With the lower interest rate, you’d pay $549,712, for a savings of $29,256. Definitely worth that $5,000.

If you are refinancing and considering buying discount points, there are different factors to consider.

With an IRRL, you must cover closing costs within 36 months in order for the VA to approve their application, something to keep in mind when doing the math. With an IRRL – the streamlined refinance – two points can be rolled into the loan. If you want to buy more, you must pay for it at closing.

With a VA cash-out refinance loan, the points can’t be rolled into the loan amount, but some lenders will allow the borrower to pay for them with the cash from the loan.

VA Temporary Buydown

The VA allows a temporary buydown of 1-3 years, in which the lender, seller, or buyer deposits money into an escrow account that is used toward loan payments every month. The standard temporary buydown is a two-year 2-1 plan, where the rate is 2% lower the first year, 1% the second year, and then the buyer pays the full rate once the agreement is over. The temporary buydown must be approved by the lender.