In a previous blog post, we covered what is arguably the biggest benefit of VA loans in Washington State — the zero down payment option. But that’s not the only advantage this military-oriented program has to offer. It can also help home buyers save money over the long term, by securing a lower mortgage rate.
On average, VA loans tend to have lower interest rates than other loan programs. That’s partly because they have a lower rate of default and foreclosure, and therefore a lower overall risk level.
VA Mortgage Rates Lower than FHA and Conventional, on Average
In Washington, VA loans typically have lower rates than FHA and conventional mortgage loans (with all other things being equal). Industry reports have shown this to be the case, and for a long period of time.
To find evidence of this, we can look to the monthly “Origination Insight Reports” published by Ellie Mae. This company provides software for the mortgage industry. Their insight reports are based on “application data from a robust sampling of approximately 80 percent of all mortgage applications” processed through their software platforms. So they’re a pretty good indicator of industry-wide trends.
Their latest report (covering September 2018) included the average mortgage rates assigned to 30-year home loans in three different categories — FHA, conventional and VA. Here were the average rates among borrowers in those three groups:
- FHA: 4.95%
- Conventional: 4.93%
- VA: 4.73%
The numbers themselves will have changed by the time you read this report. It’s the difference between the loan categories that’s more important. One of the things you’ll notice right off the bat is that the average rate assigned to VA loans was significantly lower than the average for FHA and conventional.
This has long been the case. In fact, based on Ellie Mae’s data, VA loans have had lower average interest rates than the other products for several years in a row.
Low Default Rate Among VA Borrowers
Historically, VA borrowers in Washington and nationwide have had lower default and foreclosure rates than their FHA and conventional counterparts. A “default” occurs when a homeowner stops making payments on a mortgage loan, for whatever reason.
Additionally, the VA program is backed by the financial and institutional strength of the U.S. Department of Veterans Affairs. So, generally speaking, there is less risk involved with VA loans when compared to other mortgage products.
As a result, VA-guaranteed home loans typically have lower mortgage rates. And that can be a real money-saver over time. It’s just one of several benefits to this program.
No Down Payment, and No Mortgage Insurance
Home buyers in Washington State who use a VA loan can often avoid making a down payment. That’s because the program offers financing up to 100% of the purchase price, as long as the loan amount falls within county limits.
Those who borrow more than the county loan limit might have to make a down payment. But even in those special cases, the VA financing option is usually the best deal from a borrower’s perspective.
Mortgage insurance is another key consideration. Usually, when a home buyer makes a low down payment on a loan, mortgage insurance is required. But the typical borrower who uses a VA-guaranteed home loan could avoid the extra cost of mortgage insurance — and possibly secure a lower rate as well.