Do VA Loans Have Lower Rates Than Conventional, On Average?

Marcus Marion, CMA™ 2 months ago 0 9

Do VA loans have lower mortgage rates than conventional loans, on average?

It’s one of the top questions among military members and veterans who are exploring their home loan options. And rightfully so. Your mortgage rate affects the size of your monthly payment and the total amount of money you pay over time. So it’s a significant concern.

And there’s good news on this front. While mortgage rates can vary due to a range of factors, they tend to be lower (on average) for VA loans when compared to conventional.

When you add this onto all of the other benefits this program offers, it makes a strong case for using a VA loan to buy a home.

VA Loans Typically Offer Lower Rates Than Conventional

To illustrate this point, we reviewed the average mortgage rates reported by multiple sources in February 2024, when this article was published. We then averaged those figures to get a more accurate picture of current home loan rates nationwide.

Here are the results:

  • Conventional 30-year fixed mortgage: 6.625% 
  • VA 30-year fixed mortgage: 6.375%

Of course, the average rates could be very different by the time you read this article. So we shouldn’t fixate on the exact numbers being presented here. The more important point is that VA loans typically have lower mortgage rates when compared to conventional home loans.

As you might already know, VA loans are partially guaranteed by the U.S. Department of Veterans Affairs. This government guarantee minimizes the lender’s risk if you default on the loan. It also allows lenders to offer more competitive (lower) interest rates.

VA loans also have some of the most flexible qualification criteria of any mortgage type, and for the same reasons mentioned above. There’s a lot to like about this program.

Some Important Terms You Should Know

This is a good place to clarify some of the terminology being used here:

VA loan: A mortgage loan that’s backed by the U.S. Department of Veterans Affairs. Available to active-duty service members, veterans, and eligible surviving spouses. Significant benefits include no down payment requirements, no private mortgage insurance (PMI), and often lower interest rates than conventional loans.

Conventional loan: A mortgage loan that isn’t guaranteed or insured by a government agency (like the VA or FHA). Offered by private lenders like banks and credit unions. Typically requires a down payment and may require private mortgage insurance (PMI) if the down payment is less than 20%.

Mortgage rate: The interest rate charged by a lender for a home loan. Expressed as a percentage of the loan amount and paid over the life of the loan. Your mortgage rate significantly impacts your monthly payment amount.

APR (Annual Percentage Rate): A broader measure of your loan’s cost that includes the interest rate as well as other fees like closing costs, discount points, and some lender charges. The APR gives you a truer picture of the total cost of borrowing money over the life of the loan.

When comparing mortgage rates between VA and conventional loans, or among different lenders, pay close attention to the APR. It represents the true cost and can help you compare multiple offers in an “apples-to-apples” fashion.

As mentioned, VA loans tend to offer lower mortgage interest rates than conventional financing. But that’s only part of the picture. You also want to know your annual percentage rate, which can include lender fees and other costs.

About Those ‘Average’ Mortgage Rates

When news reports talk about “mortgage rates,” they’re usually referring to the average rates reported by Freddie Mac. The government-sponsored mortgage buyer conducts a nationwide survey to determine current average rates for 15- and 30-year fixed home loans.

But there’s an important distinction between these average rates and the rate you receive when applying for a VA loan.

The actual rate a borrower receives for a home loan depends on several factors, including their credit score, debt-to-income ratio, loan amount, loan term, type of loan (e.g., fixed-rate or adjustable-rate mortgage), down payment, and current market conditions.

Lenders use these factors to assess the level of risk associated with lending to a particular borrower. Borrowers with higher credit scores and lower debt-to-income ratios are typically offered lower interest rates, because they are considered less risky.

Factors That Could Affect Your Borrowing Costs

The following factors that can affect your VA loan mortgage rate: 

  • Credit Score: A borrower’s credit score is one of the most significant factors affecting the interest rate they receive. Higher credit scores generally result in lower interest rates.
  • Debt-to-Income Ratio: Lenders assess a borrower’s ability to repay the loan by considering their debt-to-income ratio. Lower ratios typically lead to better interest rates.
  • Loan Term: The length of the loan term can also impact the interest rate. Shorter-term loans often have lower interest rates when compared to longer-term loans.
  • Amount Borrowed: Larger loan amounts may come with higher interest rates, since it also increases the level of risk for the lender.
  • Type of Loan: Fixed-rate mortgages generally have higher interest rates compared to adjustable-rate mortgages (ARMs) initially. But ARMs can become more expensive over time if interest rates rise.
  • Down Payment: A larger down payment can lead to lower interest rates because it reduces the lender’s risk. *

(* You don’t have to make a down payment when using a VA loan. Just know that it could help you qualify for a lower rate, while also reducing your monthly payments.)

In summary, the average rate for VA loans typically runs a bit lower than conventional mortgage loans. This program also allows eligible borrowers to finance 100% of the purchase price while avoiding mortgage insurance. So is certainly worth considering.

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