by Grant Moon, VA Loan Captain
The interest rate on a VA mortgage is one of the most important components of the home loan. The interest rate will establish the principal and interest payment and can help approve or deny a loan application based upon how high or low the monthly payment is in relation to the borrower's monthly income. The VA mortgage rate is included with the loan term and the loan amount to calculate the mortgage payment.
When potential VA borrowers begin their search for a VA mortgage, the first quest is often finding the best VA rate. Most often, VA lenders will have slight variances in their quoted interest rates compared to other lenders. Some may mistakenly think that the VA itself sets mortgage rates for the industry but that's not correct. In the past, the VA did in fact set VA lending rates but today that's simply not the case. When lenders are allowed to set their own rates, it helps the consumer by keeping the VA loan market competitive not only with other loan types but between individual VA lenders as well.
But how do interest rates change and who changes them?
This acronym, GNMA stands for the Government National Mortgage Association and is a cousin of Fannie Mae and Freddie Mac. GNMA, or Ginnie Mae, provides a similar function that Fannie and Freddie do by providing liquidity in the mortgage market.
This means Ginnie Mae will buy VA home loans from VA lenders and allows lenders to sell VA loans to one another. Lenders sell their loans in order to provide additional cash to make even more loans and as long as VA loans are underwritten to the same guidelines, buyers and sellers of VA loans know ahead of time what they're buying and selling. The GNMA 30yr is a bond that is traded throughout the day. Similar to other bonds and securities, investors buy and sell this bond based upon their own internal investing strategies. Investors can also invest in the stock market or money market funds or any financial vehicle that can provide a return to investors.
Each day, all VA mortgage lenders review the existing price of the Ginnie Mae bond and price their VA rate accordingly. Because VA lenders all tie their VA rates to the same index, VA rates from lender to lender will be very similar in rate. That means you won't find one lender offering a 30 year fixed rate at 4.00 percent while everyone else is at 5.00 percent, all things being equal.
Why do investors buy bonds? Bonds provide a predictable, stable return. When an investor buys a
bond, there's a guaranteed return, unlike a stock. When an investor buys a stock in a company, the investor is speculating and hoping the stock increases in value or the investor can “short” the stock and bet that the price will go down in the future. Either way, stocks do not provide a guaranteed return and bonds do. In times of voliatility or an investor seeks the inherent safety in a bond, a bond is purchased. If several investors want to buy the same bond, the price of the bond increases with the increase in demand.
When the price of a bond goes up, the interest on the bond moves in the opposite direction. The bottom line? When economic times are tenuous, like they are now, interest rates will be relatively low. In booming economic times, rates will be higher as investors move out of bonds like the GNMA 30yr and into stocks.
That's why since 2007 when the economy really began taking a sharp turn for the worse, mortgage rates began their gradual fall to levels we see today. And as soon as the economy shows continued signs of economic strength, rates will begin to move higher.
When Do Rates Change?
VA loan rates can change almost daily and in fact during volatile trading days, an interest rate might be different in the afternoon compared to the rate first introduced in the morning.
As investors ponder interest rate moves, they look at how the economy is currently performing. For example, if the economy looks like it's going to be on the upswing, investors can pull money out of the GNMA 30yr bond and move those funds into stocks in anticipation of a robust economy.
On the other hand, if it appears the economy is flat or faltering with no signs of a recovery in the near future, investors can keep their money in bonds or invest even more in the GNMA 30yr.
For example, if an Unemployment Report came out showing that more people were out of work or that factory orders were down, both indicate a poor economy that will drive down rates. Conversely, cheery news on the economy suggests low interest rates are in the rear view mirror and the stock market is ready for a rebound.
Should you follow economic reports to determine whether or not to buy a house or refinance an existing loan? Perhaps, but it's really not necessary for most. But it does help to know why interest rates move up. And down.
Grant Moon is founder and President of VA Loan Captain Inc. which assists veterans with VA loans, and author of a soon-to-be-released guide on VA loans.