Purchasing a home isn’t the first time pre-approved loan VA buyers will encounter an interest rate, but it is the first time they can actually make it official. Interest rates reflect the cost of borrowing money. Your credit score, the type of loan you’re seeking and other factors can all play a role in what rate you get quoted.
One of the benefits of VA loans is that they typically feature lower average interest rates than other loans, including conventional loans. The interest rate will directly affect your monthly payment. So let’s take a look at an example with a 30 year fixed rate VA loan at $300,000.
Interest Rates And Their Effects On Your Monthly Payments
Based on the table below, you can see how the interest rate affects the monthly principal and interest portions of the mortgage payment. You can see that with a 5% interest rate you’ll get monthly principal and interest payment of $1,646. If you jump that interest rate just 1%, you’re seeing an increase in your monthly payment of approximately $200, with a $1,838 payment.
So a different interest rate can have a significant impact.
Lenders will quote you an interest rate when you begin the pre-qualification and pre-approval 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 in that 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. The other important consideration with interest rates is that they don’t tell the whole story when it comes to financing.
The Annual Percentage Rate (or APR)
When you’re comparison shopping among different mortgage lenders, you shouldn’t just look at the interest rate, which you’ll also hear referenced as the “note rate”. You’ll also want to compare the annual percentage rate or APR as well. The APR considers your interest rate along with any other costs and fees associated with getting a loan. In some cases, it can be a better representation of the overall cost of borrowing money.
To calculate the APR for this example, we’re assuming you’re a first-time buyer who’s paying both a 1% 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 Truth and Lending Statement you receive from the lender.
Your interest rate and your APR aren’t likely going to be the same. That’s because the APR factors in the other costs that are associated with getting a loan. So when shopping around, focus on the big picture, the note rate, the APR and closing cost estimates to ensure you make an apples-to-apples comparison.