Fixed vs Adjustable
While interest rates are applied to almost any type of loan or line of credit (credit cards, student loans, etc.) mortgage payments typically have two types of rates: fixed rates or adjustable rates.
|
Fixed Rates |
Adjustable Rates |
|---|---|
|
Same rate that remains unchanged throughout the entire life of the loan |
Subject to change throughout the life of the loan |
|
Simple and easy to track over the life of the loan |
Much more complicated and can be difficult to track over time |
|
Easy for budgeting because the amounts paid each month are set for the life of the loan |
Interest rate is set below the market rate initially and then changes over time with the market |
|
Stable rate protects from sudden (and potentially significant) increases if interest rates rise |
There is a period where the loan has a fixed-rate but that period can vary significantly and after that point the rate is subject to change |
When determining which of these rates is best for you, you’ll want to consider all aspects of each rate in addition to your personal situation. Think about how much you can afford to pay today for your mortgage, if you would be able to afford your mortgage if it were to rise, and how long you intend on living in the home as you make your decision.
Example of fixed vs. adjustable
Both examples have a:
30 year mortgage
Home price of $300,000
|
Fixed Rate-30 year fixed Monthly Mortgage Payment (interest rate) |
Adjustable Rate- 5/1 ARM Monthly Mortgage Payment (interest rate) |
|
|---|---|---|
|
Years 0-5 |
$1,350 (3.5%) |
$1,250 (3%) |
|
Years 5-10 |
$1,350 (3.5%) |
$1,350 (3.5%) |
|
Years 10-15 |
$1,350 (3.5%) |
$1,430 (4%) |
|
Years 15-20 |
$1,350 (3.5%) |
$1,520 (4.5%) |
|
Years 20-25 |
$1,350 (3.5%) |
$1,610 (5%) |
|
Years 25-30 |
$1,350 (3.5%) |
$1,700 (5.5%) |
“Rates quoted above are for example purposes only. Your actual rate and payment may be different. Please contact a loan officer at Military HomeSpot Lending to get a custom quote”
While Adjustable Rate Mortgages can prove to be cost effective in certain situations, we highly recommend you talk with a licensed loan officer to decide if this is the right product for you. A majority of veterans choose Fixed-Rates over Adjustable Rates due to the fact they will know what their monthly cost is for the entire term of the mortgage.
What Determines My Rate?
It’s important to note that the Department of Veterans Affairs does not set interest rates. Instead, your lender will determine the rate you receive on your VA Loan based on a number of factors including the following:
- Your financial situation: having a great credit score and a good financial situation can leave you poised to receive a better credit score.
- Length of the loan: as a general rule of thumb, the shorter the length of your loan, the smaller the interest rate.
- Type of loan: each loan comes with its own unique factors and details that the rate may be affected by. The rate will change based on if the loan is a purchase, refinance, jumbo, or other type of VA Loan.
- Current market conditions: these fluctuate often based on supply and demand across the nation when it comes to the real estate industry.
Because interest rates change all the time, you may have heard the term “rate lock”. Rate locks guarantee the interest rate you’ve secured for a specific period of time. This typically lasts anywhere from 30-90 days and is designed to cover the period from an accepted offer to the closing table so that what you agree to up front is what you are getting at the end.
VA Rates vs. Other Products
With every VA Loan, the financing doesn’t come from the Department of Veterans Affairs but instead is given by an approved, private lender and the government guarantees or insures the loan. Since the VA backs a portion of each VA Loan, lenders are able to offer highly competitive interest rates. These rates are often significantly lower than other loan products like FHA and conventional loans.
What is APR?
A term often used when discussing interest rates is APR. APR means Annual Percentage Rate and is essentially the price you pay to borrow money. The rate is generally higher than your base interest rate with a VA Loan and it is determined by interest rates, origination fees, closing fees for realtors, discount points, and other fees calculated together using the formula shown below.
APR = Annual Percentage Rate
Interest = Total amount of interest paid over the life of the loan
Principal = Total loan amount
N = # of days in the loan term
The Difference Between APR and Interest Rates
APR and interest rates are often considered the same, but they are actually two different types of rates. Interest rates represent the percentage a borrower is charged on the principal loan amount. APR covers a broader spectrum and includes other costs in addition to the interest rates. The APR is a great way to compare two lenders offering the same interest rate. If one lender has a higher APR for the same interest rate, then you, the consumer, can safely assume that lender is charging more for the same rate. APRs give the prospective home buyer the ability to quickly compare loan estimates without.
Example of how higher fees can affect the APR
Both examples have a:
- House price of $300,000
- 20% down payment
- 30 year loan term
- 4.5% interest rate
|
$1,500 loan fees |
$5,000 loan fees |
|
|---|---|---|
|
Real APR |
4.597% |
4.725% |
Main Points to Note about Interest Rates with VA Loans
The VA Home Loan is a powerful loan that is backed by the Department of Veterans Affairs. Because the loan is insured by the government, VA-approved lenders are able to charge some of the lowest interest rates on the market. These rates are often much lower than rates you would receive with a conventional mortgage. While the VA doesn’t set the interest rates, approved lenders combine the borrower's credit score, loan type and duration, and current market conditions to offer low interest rates on VA-backed loans.