If there’s one thing most borrowers want to know, it’s what interest rate they can get. When you refinance with the VA IRRRL, chances are it’s because you want a lower rate. So how do lenders figure out which rate they will charge you?
It’s based on many factors, some of which you can control and others which you cannot. Putting them all together will help you determine which rate you may get when you want to apply for the VA streamline loan.
It’s All About the Risk
The bottom line is that it’s all about how much risk you pose to the lender. The lower your risk, the lower your interest rate – it’s that simple. But, how do you lower your risk? Lenders look at many factors when deciding your risk level. Among them are your credit score, LTV, home’s location, and the loan term, just to name a few.
Below we’ll discuss these items in detail.
If you understand the VA IRRRL, you know that lenders don’t have to pull your credit score to qualify you for the loan. Lenders can use your original credit score from when you took out your VA loan. All the VA requires is for lenders to make sure you paid your mortgage payments on time for the last 12 months. So what does your credit score have to do with your rate?
It lets lenders know your level of financial responsibility. The interest rate the lender provides will be based on the feelings they have regarding your ability to pay your bills. If your credit score when you took out the VA loan originally was low, be prepared for a slightly higher interest rate. One way around this, though, is to request that the lender pull your credit again. If your score has improved, this can work to your benefit.
The loan-to-value ratio is another way lenders determine your level of risk. The more you owe compared to the home’s value, the higher risk of default you pose. Because you likely borrowed 100% of the home’s value when you bought the home, you may still have a rather high LTV. Keep that in mind as you shop around for the lowest rate.
It’s best if you can pay the principal down as much as possible. If you know the home appreciated a lot, it may be beneficial to pay an appraisal to prove it. Of course, you should talk to various lenders to see their thoughts on it first. Some lenders may even run an automatic valuation that doesn’t require you to pay for an appraisal. But, this method could give you the lower LTV that you need to keep that interest rate down.
The location of your home is one of those things that you can’t control. Some areas are ‘riskier’ than others and therefore get higher interest rates by default. You can find out the average rates for our area and base your decision to refinance on those rates. While it’s unlikely that you’ll pick up and move because rates are 1/8th to ½ point higher, every dollar makes a difference!
The Mortgage Term
The longer you borrow money from a lender, the higher the interest rate in most cases. The longer you keep a lender’s money, the more risk you pose. They cannot lend that money to someone else until you repay it. In the meantime, they’ll want to charge you more money just to keep their profits up and to make up for the risk level.
You’ll usually get the lowest rates when you choose a fixed rate mortgage with a 15-year term. However, an adjustable rate loan may provide you with a low introductory rate that is subject to adjustments when the introductory period ends. You’ll have to weigh your options to determine which one would suit you best.
While you can’t predict the interest rate a lender will give you, there are ways you can increase your chances of a lower rate. Lowering your risk will prompt a lender to give you the lowest rates available. Talk to several lenders to see what they have to say about your risk level and then fix any factors that may make you high risk.