If you’ve been looking at VA loans lately, you may have noticed that mortgage rates are still low compared to recent years.
What you’re seeing is not the marketplace at work, if by “marketplace,” we mean loan rates which are the result of freely-moving supply and demand. Instead, rates are low today in some part because of the Federal Reserve’s intervention.
We know this intervention is important because last week the Fed released notes from its January meeting and the stock market instantly took a tumble. The reason: The notes suggested that the Fed would not be active in the mortgage marketplace forever.
Here’s what’s going on:
In September the Fed announced that it could begin buying mortgage-backed securities worth $40 billion per month. By bringing more cash into the marketplace (supply) the Fed is effectively forcing down rates. Indeed, according to Federal Reserve Governor Jeremy C. Stein, loan rates fell 0.2 percent merely on the basis of the Fed announcement.
Buying mortgage-backed securities has an important impact on home lending rates because of the way the lending system works: A lender originates a mortgage and then turns around and usually sells the mortgage into the secondary market, an electronic fishbowl for mortgages are bought and sold. A loan packager cobbles together 5,000 or 10,000 mortgages and creates a mortgage-backed security or MBS. Interests in the MBS are sold to investors, the cash from investors is used to create new mortgages and the cycle repeats itself continuously.
By purchasing mortgage-backed securities worth $40 billion a month the Fed is flooding the mortgage marketplace with capital and that flood is keeping rates steady if not pushing them lower. The catch, of course, is that the Fed cannot do this eternally, at some point it has to stop and when it does the artificial prod which has been holding down rates will be removed.
For vets and military households the mechanics of lower rates are less important than the reality that low rates continue to be available for VA mortgages. How much longer such low rates will be out there is unknown.
Right now, new VA financing is available nationwide as are Streamline refinances. Perhaps most interesting refinancing options right now is the VA Interest Rate Reduction Refinance Loan (IRRRL)
The point of an IRRRL is to knock down the interest rate and thus monthly costs. Also, you can use the program to switch from an adjustable-rate mortgage to a fixed-rate loan. There’s no required appraisal and refinancing costs can be included in the new loan amount or with an interest-rate bum.
You cannot get cash from your home using an IRRRL, but you may be able to cut monthly expenses considerably, especially if your current mortgage carries a relatively higher rate. Speak with your VA lender for details.
Photo courtesy Danielle Walquist Lynch