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VA home loans are special loans designed for veterans and they provide very advantageous terms. One of the main issues with mortgage loans (due to the high amounts involved and the long terms implied) is the interest rate paid for the money owed. A minimum variation of the interest rate implies thousands of dollars on interests over the whole life of the loan. VA home loans feature lower rates than regular mortgage loans and though this is not the only benefit you can obtain by applying for a VA loan instead of a regular mortgage loan, this sole benefit justifies the use of this loan type by those who are veterans and thus qualify for them.
Determining The Interest Rate
In order to define the interest rate on VA loans, the lenders do what they do with all types of mortgage loans: The lenders perform a credit assessment by requesting a copy of your credit report to major credit bureaus in order to evaluate your credit worthiness. They will also evaluate your income and paying capacity but these factors will affect mostly other loan terms like the loan amount and the repayment schedule.
Why are VA loan interest rates significantly lower than those of common mortgage loans? The answer to this question is fairly simple: The veteran affairs department guarantees these loans so lenders have little to worry about in case the borrower fails to meet the monthly payments on the loan taken. The risk of default is thus greatly reduced and thus lenders are prepared to provide a much more competitive rate.
Taking Advantage of Adjustable Rates
Just like with other loan types, VA loans can feature even lower interest rates if you select a variable interest rate or adjustable interest rate instead of a fixed rate. This is due to the fact that the lender is taking a higher risk by offering a fixed rate because due to inflation fixed rate payments can be left behind while variable rate loan payments are adjusted when market variations affect the rates.
Thus, if you think that your income will allow you to cope with higher monthly payments in case market situations boost the loan rates, you can save thousands of dollars by selecting a variable rate instead of a fixed rate. Moreover, variable rate loans usually let you obtain longer repayment programs than fixed rate loans and thus, give you the opportunity to obtain lower monthly payments.
Moreover, since VA loans are guaranteed by the veteran benefits administration, the risk involved in these transactions is lower and thus, the advantages that variable interest rates on VA loans provide are augmented by this reduced risk factor. That being said, you should be very careful when selecting the interest rate type as if you fail to meet the monthly payments due to a sudden increase on the adjustable interest rate, you risk losing the property to repossession because despite the fact that the loan may be guaranteed and subsidized, defaulting on the loan can still trigger legal actions against you (though you will probably be offered to refinance the loan at first).
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