Tips & Special Topics
VA Loans- How low can interest rates go?
Added February 2, 2009
Bond prices soar, yields plummet, interest rates drop; these are classic recession symptoms. The 2009 New Year has mortgage rates at an historic low – the lowest they’ve been since 1971. VA loan borrowers want to know -- how low can they go? And what does this mean for VA loan rates?
Experts say the latter half of 2008 and beginning of 2009 represent the worst housing market since the great depression. On a positive note, experts are hoping the drop in interest rates will kick-start the market and begin to heal the economy. Naturally when mortgage rates fall, people rush to refinance. The steepest drop happened just before Thanksgiving 2008 when the Federal Reserve announced it would buy $600 billion in mortgage-backed securities from Fannie Mae and Freddie Mac in the form of a bailout. Shortly thereafter, in December 2008, the Treasury Department announced their target interest rate of 4.5%.
For borrowers, it’s a waiting game and somewhat of a gamble. Do you act now on a home refinance or purchase before rates ultimately rise? Or do you take the chance that rates drop even lower, and wait a while? Of course, those who choose to wait run the risk that rates will never drop and may even go up. So what is a VA borrower to do?
According to the Bloomberg Report, rates would normally be a half point lower in this circumstance based on the historically direct relationship between home loans and mortgage bonds. For some people, the relatively small effect a half percentage point has on a monthly payment is overshadowed by the amount a half point can affect the total cost of a mortgage over time. This is why waiting may seem enticing to some.
The announcement of the 4.5% target may have inadvertently stifled lending, because some borrowers may be inclined to wait for the “optimum rate” rather than act. The fact is that 4.5% is just the Treasury Department’s general goal. There is no guarantee that the target rate will be widely available to most borrowers without paying discount points (fees used to lower rates). Therefore some may wait in vain.
Mortgage rates are determined by many things. Credit scores, mortgage history, income documentation, discount points, and many other factors can raise or lower an individual mortgage rate. Average mortgage rates fell to 5.19% on a 30-yr fixed loan, according to Freddie Mac’s December 18, 2008 Weekly Primary Mortgage Survey. That is down significantly from the high of 6.46% in their October 30, 2008 Survey. Historically, this represents a very rapid rate drop, which is why some experts are predicting rates could go even lower.
Historic low mortgage rates may motivate consumers to buy up some of the excess foreclosed homes that are sitting vacant and tying up bank inventories. The low rates may also help some people refinance to better terms and more affordable monthly payments. Those refinancing into a lower rate may have more money to spend on paying down debt and other things. Many people seeking conventional or FHA loans will most likely need to have money for a down payment.
For those seeking VA mortgages, however, waiting for a few tenths of a point lower rate might not be as imperative as the immediate zero down and 100% financing benefits associated with veterans’ loans. Those VA-eligible borrowers with equity in their homes can get cash out now to pay down debts, make home improvements or pay for other things they need.
At any rate, VA loans may make sense to those who are eligible. There are benefits associated with veterans’ loans that may make them a wise choice for a VA-eligible borrower in any market. Some of these benefits include:
• Zero down payment
• 100% financing on refinances and purchases
• No private mortgage insurance
• No prepayment penalty
• Limits unique to VA allow for loans over $417,000 in some counties
• Streamline refinance capabilities
A VA loan can be refinanced under the VA’s streamline refinance program - often with closing costs rolled into the loan. That’s why waiting for rates to drop further is deemed unnecessary by many VA borrowers. Those considering VA loans can act at today’s rates knowing that if interest rates drop even lower, a VA streamline refinance may enable them to lower their rate again. There is no need for an appraisal and no re-qualifying requirements required with a streamline refinance. Mortgage history is considered with a VA streamline refinance loan. For VA loans, low VA interest rates are icing on the cake.
There are still other actions the government could take to wag the interest rate dog. For instance, the Fed could buy mortgage-backed securities. On Dec 15, 2008 the National Association of Realtors posted a press release online favoring a plan where funds allocated for the Troubled Asset Relief Program (TARP) would be used to buy down mortgage rates by paying points. Fannie Mae and Freddie Mac would in turn buy mortgages at 4.5% and pay lenders the full market rate.
Only time will tell how low interest rates will go. The only thing that is certain is that VA loan benefits are as attractive as they’ve ever been and refinancing or streamlining with a VA mortgage at today’s low rates can be a sound option for VA-eligible borrowers.
