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Lesson 6.4

Interest Rates

Samantha Reeves | Real Estate Expert

Borrowing Costs

Interest rates reflect the cost of borrowing money. Your credit score, the type of loan you’re seeking, the lender you’re talking with and other factors can all play a role in what rate you get quoted. Every buyer’s situation is different.

One of the benefits of VA loans is they typically feature lower average interest rates than other loans, including conventional. The interest rate will directly affect your monthly payment.

Let’s look at an example for a 30-year fixed-rate VA loan at $300,000. We'll also assume this is a first-time buyer who will finance the 2.15 percent VA Funding Fee.

You can see how the interest rate affects the monthly principal and interest portions of the mortgage payment:

A look at how interest rates can affect your monthly mortgage payment:
Interest Rate APR Principal & Interest Payment
4.75% 5.02% $1,599
5% 5.28% $1,646
5.50% 5.79% $1,741
5.75% 6.04% $1,789
6% 6.30% $1,838
6.50% 6.80% $1,938

It’s important to understand that the VA doesn’t set interest rates. Lenders set their own rates, based in part on what’s happening in the mortgage bond market. Rates can change multiple times in a single day, and two different lenders may quote you two very different rates.

When you’re talking with lenders about rates, it’s also key to make sure you’re comparing apples to apples. Make sure lenders are quoting you a rate based on the same credit score and loan amount, and ask for the rate without paying any discount points. A discount point is equal to 1 percent of the loan amount, and it’s cash paid at closing to buy a lower interest rate.

Annual Percentage Rate (APR)

The other important consideration with interest rates is that they don’t tell the whole story when it comes to financing. When you’re comparison-shopping among different mortgage lenders, you shouldn’t just look at the interest rate, which you’ll also hear referred to as the “note rate.”

You’ll want to compare both the note rate and the annual percentage rate, or APR, as well. The APR considers your interest rate along with any other costs and fees associated with financing the purchase. In some cases, it can be a better representation of the overall costs of borrowing money.

To calculate the APR for the above example, we’re assuming you’re a first-time buyer who’s paying both a 1 percent origination charge and the VA Funding Fee. That comes out to about $10,000 in costs and fees for this example.

The APR will be disclosed in the Loan Estimate you receive from a lender.

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Your interest rate and your APR aren’t likely to be the same. Again, that’s because the APR factors in the other costs and fees associated with the loan.

When shopping around, focus on the big picture – the interest rate, the APR and closing cost estimates – to ensure you get a truly accurate comparison.

Float v. Lock

Getting under contract to purchase a home isn’t the first time preapproved VA buyers will encounter an interest rate. But it’s the first time they can actually make it official.

Lenders will quote you an interest rate when you begin the prequalification and preapproval process. But you can’t set that rate in stone until you’ve signed a purchase agreement. Until then, you have a “floating” interest rate, meaning it can go up or down before closing.

Once you’re under contract, you can ask a lender to lock your rate. Rate locks are typically good for a set period of time, like 30 or 60 days. It’s up to you to decide when to lock your rate. Interest rates could either rise or fall before your loan closing.

Buyers often look to their lender and loan officer for help on when to lock. And that’s a good idea. But you can help yourself by doing some homework on current interest rates and what the economic outlook is like as your loan closing nears.

Don’t agonize over when to lock your interest rate. If you’re comfortable with the rate and your monthly payment, and you’re confident in the advice you’re getting from your loan officer and your real estate agent, go with your gut and don’t look back.