Home Ownership Most Popular Articles

Why Are VA Loans So Popular?

Purchasing a home with VA Loan

Recently I attended the Veteran Owned Small Business Conference, which hosted government procurement decisionmakers from various government agencies that want to do business with veteran-owned businesses.

I had the opportunity to meet with a senior official with the Veterans Affairs Loan Guarantee Program who is responsible for oversight and execution of the VA Home Loan Program. Interestingly, he informed me that in 2012 VA Loans are expected to reach an all-time high, with an anticipated 500,000 uses in fiscal year 2012 which is approximately a 20% increase from 2011.

This sparked my interest into why VA loans have become so popular, and I've provided my insight below.

Falling Interest Rates

Currently interest rates are at all-time historic lows. Today, The Federal Housing Finance Agency reported that the national average contract rate for the purchases was 3.67% based on closings in June 2012 vs. June 2011, which was 4.62%.

In just one year the rates have dropped almost a full percentage point. For a $200,000 fixed-rate loan the interest difference between the two rates for a 30 year fixed loan is $1,345.11 a year, which is a substantial savings, especially when you multiply this figure over the life of the loan.

To provide some context on how low interests have gone, in June 2002 rates were at 6.62% -- close to double the rates today. VA loans also can often provide even better rates than other loan types.

Historically Low Property Prices

Property prices and interest rates have historically operated opposite of each other. When interest rates went up, purchase prices typically went down, and vice versa. Recently, the previous trend no longer holds true as housing prices and interest rates have fallen in tandem with each other.

It is no secret that the housing crisis impacted many people negatively as current owners saw their homes' value decline. However, those in the market to purchase a home have a great opportunity to buy at a low price. Zillow’s Real Estate Market Report which covers 167 metropolitan areas, pegs the average home value at $149,300, which is at 2003 levels.

More Veterans Coming Home

According to Veterans Affairs approximately 27 million veterans are eligible for VA home loan benefits. With the draw down in military presence after fighting decade-long wars along with the reduction in forces, more veterans are integrating into society.

Benefit Popularity

The below chart illustrates the 2010 benefits usage by type. As you will see the active VA Loan Participants show that the VA Loan Guarantee Program is the 4th most utilized veterans benefit.

2010 Number of Veterans Using a VA Benefit

Motivation

If you are like me and deployed overseas, one of my goals when I returned was to own a home of my own. In essence, having the freedom and the means to own a home is part of the American Dream which I very much wanted to be a part of.

Conclusion

There are many benefits to owning a home -- however, like any big financial commitment, you should not take this decision lightly. Good financial management starts with knowing what you can afford. You should have a budget in mind and just because you can afford a more expensive home doesn't mean that you should live to your maximum means.

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