VA LOAN CAPTAIN BLOG & Learning Center

The Federal Reserve and Your VA Loan

By: Grant Moon 03/17/14 10:55 am

The Federal Reserve and Your VA Loan

When VA loan officers, borrowers and others talk about mortgage rates, inevitably the conversation turns toward the Federal Reserve, or “the Fed.” What will the Fed do and when will they do it? Who’s going to be the next Fed chair? When does the Fed meet next? What did the Fed say? Have you heard those sentences spoken at one time or the other? You probably have if you’re in the process or soon will be applying for a VA home loan. Why all the talk of the Fed and what does the Fed do?

Originally created way back in December of 1913, the Federal Reserve is the central banking system for the United States. The Federal Reserve, or Fed supervises the nation’s banking system attempts to control the cost of money. The Fed’s actions directly affect the cost of funds if not directly then indirectly for most all types of consumer and business loans.

The Fed attempts to affect the economy by making money more or less expensive. The Fed sets the interest rates that banks may borrow from one another and for loans directly from the Federal Reserve. The Fed does not set your VA mortgage rate, VA lenders do, but they do set the bar for the Federal Funds and the Discount rate, rates charged banks for short term lending.

When the Fed lowers rates, it can encourage consumers to borrow more and stimulate the economy. When the Fed raises rates, the attempt is just the opposite—to slow down a potentially overheating economy. In good economic times, VA mortgage rates are higher compared to poor economic conditions. VA lenders set their mortgage rates each day on the same index that is ultimately affected by Fed moves.

The Federal Open Market Committee, or FOMC, is an ARM of the Fed and meets about eight times per year to discuss possible Fed actions to affect the economy, including raising, lowering, or keeping current rates the same.

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