Some people believe that because VA mortgages are government-backed, their rates and fees are set by the government. That is not and has never been the case. VA mortgages are sold, processed, underwritten and funded by private lenders like banks, credit unions, and mortgage companies. Each lender prices its loans independently.
Studies have shown that mortgage rates can vary between lenders by .25 percent to .50 percent on a given day. And HUD recently concluded that homeowners could save hundreds of dollars in loan fees by simply obtaining two to four mortgage quotes when they shopped for home loans. It’s easy to compare mortgage offers online, and you could save a lot of money without breaking a sweat.
It’s a common misperception that government loans are limited to boring plain vanilla products. That’s just not the case today. Here are some of the most popular products that VA mortgage lenders offer.
VA guarantees loans to purchase homes made with the following repayment plans:
- Traditional fixed-rate mortgage (FRM)
This mortgage features a rate that does not change and requires equal monthly payments for its entire term. Each monthly payment covers the monthly interest due and the remainder is used to reduce the principal balance until it equals zero. This repayment schedule is referred to as “fully-amortizing.” Fixed-rate VA mortgages can come with 10, 15, 20, 25 and 30-year terms. Typically, the shorter the term of the mortgage, the lower the interest rate.
- Adjustable rate mortgage (ARM)
ARM loans typically start at an interest rate that’s lower than the market rate; however the interest rate can be adjusted – up or down – during the life of the loan. A one-year ARM allows annual adjustments of no more than one percent and a lifetime cap of five percent – this is much better than conventional ARMs, which typically allow adjustments of up to two percent per year and have lifetime caps of six percent.
- Hybrid adjustable rate mortgages (HARMs)
This loan combines the advantages of fixed and adjustable rate mortgages. Hybrid ARM loans feature an initial fixed rate for a period of at least three years, followed by annual adjustments. Depending on the length of the fixed rate period, the initial adjustment can be up to two percent and the lifetime cap is either five percent or six percent. Hybrid ARM rates can be significantly lower than fixed rates, and can be a great alternative for anyone who doesn’t plan to keep the loan more than a few years.
- Energy Efficient Mortgage (EEM)
The VA program allows up to $6,000 in improvements (or more if an appraisal shows the im-provements will be 100% offset by an increase in the home's value) to be added to the home purchase or refi as long as the total does not exceed VA loan limits. No special underwriting is required; the VA just says that the mortgage lender "must evaluate the veteran's ability to pay the increased loan payments caused by the addition of energy efficiency improvements."
- Oddball VA home loans
- These next loans are not common. While the VA allows them, many lenders don’t offer them, especially when the economy is weak. They are included here so that if someone offers them to you, you’ll know what they are.
- VA construction mortgage
The VA says, “Although they are allowed by law, most lenders do not make construction loans for VA loans, largely due to risks and costs of construction disputes. You can be your own contractor, but you will have to find your own source for construction financing. Once the home is complete, you could then get a VA loan to refinance the construction loan. Funds from the VA loan could also be used to pay off the balance of the loan on the land, provided that the total VA mortgage amount does not exceed the VA reasonable (appraised) value of the property. The house would be considered an existing home once construction was complete.” Another option is an FHA 203(k) loan, which is fairly common and allows you to purchase and rehabilitate or build a home.
- GPM (graduated payment mortgage)
This repayment plan allows smaller-than-normal monthly payments for the first few years, which gradually increase each year - and then level off after the end of the "graduation period." You'll have larger-than-normal payments for the remaining term of the loan. The reduction in the monthly payment in the early years of the loan is accomplished by delaying a portion of the interest due on the loan each month and by adding that interest to the principal balance. This is referred to as “negative amortization.” This is, according to the VA, an appropriate mortgage for applicants whose income will increase substantially in the future. There is a catch, however – your loan amount is adjusted down by the amount of expected negative amortization, so you’d have to come up with a down payment.
The seller of a home, a friend or relative may "buy down" the veteran's mortgage payments by making a large lump-sum payment at closing that will be used to supplement the monthly pay-ments for a certain period, usually 1 to 3 years. For example, a borrower with a 3-2-1 buydown for a mortgage with a four percent rate would pay one percent in year one (four percent minus three percent), two percent in year two, three percent in year four, and four percent for the rest of the mortgage term.
- GEM (Growing Equity Mortgage)
This repayment plan provides for a gradual annual increase in the monthly payments with all of the increase applied to the principal balance. The annual increases in the monthly payment may be fixed (for example, 3 percent per year) or variable. The increases to the monthly payment result in an early payoff of the loan in about 11 to16 years for a typical 30 year mortgage (this strategy is also referred to as “forced savings”). The idea is that as your income increases, you direct more of it to paying down your mortgage and increasing your net worth.
Choosing your loan
When shopping for a refinance mortgage or new home loan, knowing how long you plan to keep your home helps you and your loan officer choose the right product and pricing structure. Here’s an example of how you might approach a mortgage decision:
You want to buy a new home. In five years, you expect to have a lot more income, and you plan to sell and move into a more expensive home at that time. You can choose from several mortgages:
- 30-year fixed VA home loan
- 15-year fixed VA home loan
- 1-year VA adjustable rate mortgage
- VA hybrid ARMs, fixed for 3, 5, 7 or 10 years
The 30-year loan is extremely stable; your interest rate will not change over the life of the loan, and when you sell your property, the buyer may be able to assume your mortgage. However, 30-year mortgages carry the highest rates.
The 15-year loan, like the 30-year fixed mortgage, has an unchanging rate, and that rate is usually about .5% lower than comparable 30-year mortgage rates. Because you pay your home off in half the time, your payments are larger and you pay much less interest over the loan’s lifetime.
A 1-year ARM may have a very low initial rate. That rate can increase by 1% every year to a maximum of five percent over your initial rate. It might not hit its maximum rate, but it could.
The 3/1, 5/1, 7/1 and 10/1 loans are known as hybrids. They offer rates that are fixed for three, five, seven or ten years. The initial rates can be much lower than the 30-year or 15-year mortgage rates, and this could save you a lot of money. For example, if you plan to keep a home for five years, you could compare a 30-year loan at 3.75 percent, a 15-year loan at 3.25 percent, and a 5/1 loan at 2.75 percent.
Loan Amount: $193,000 30 yr FRM 15 Yr FRM 5/1 ARM
Rate 3.75% 3.25% 2.75%
Payment $893.81 $1,356.15 $787.91
Total Paid 5 Years $53,628.79 $81,369.04 $47,274.33
Total Interest 5 Years $34,478.01 $27,149.66 $25,071.41
Comparing mortgage quotes
Here’s what you need to know about comparing mortgage quotes.
- Get it in writing
A mortgage quote should include the mortgage rate and the costs of getting the loan, including fees, service charges or points paid to the lender and money paid to third parties like appraisers and title insurers. A lender may give you a Good Faith Estimate (GFE), which carries a legal obligation to honor the quote, or a worksheet, which does not.
To provide a GFE, the lender needs more information – your rate depends on factors like your credit score, down payment, loan type, and property use. Without this information, lenders can give you a quote, but it might not be realistic.
- Shop quickly
Try to get your quotes the same day, whether you go in-person to local lenders, make a few phone calls, or check out the Internet. This is because mortgage rates are influenced by global stock and bond markets and can change all day long. Comparing a Monday quote from Lender A with a Friday quote from Lender B may not be terribly useful. If you get GFE disclosures, they should indicate how long a quote is valid.
- Review your mortgage quotes carefully.
Narrow your search to two or three lenders with competitive rates and then contact a loan officer from each. Discuss your home purchase with these folks and select one who operates in your comfort zone. You’ll be discussing rather private things with this person and trusting him or her with an important and expensive purchase. Make sure your loan pro operates in your comfort zone.
It’s easy to shop for a mortgage online
When it comes to shopping for a VA mortgage, the need for speed can be best met by shopping online. The neighborhood bank isn’t the only game in town anymore. You can get and compare mortgage loan quotes from lenders online in minutes. You provide your requirements, the lenders give you their rate and terms, and you can evaluate and choose your loan at home with no pressure. Why not compare and save money when it’s that easy?