WASHINGTON — The Veterans Administration said Friday it will raise its maximum interest rate for guaranteed home loans to 11% from its current 10.5%, the highest level in more than two years.
The VA, which helps military veterans buy homes with little or no down payment, said the increase, to take effect Monday, was needed to bring its rate in line with the mortgage market. The rate represents the maximum the VA will allow a veteran to pay when obtaining a mortgage from a bank.
It was the second VA rate rise in a month and raised the rate to its highest level since June, 1985, when it was 11.5%.
On Sept. 8, the VA raised its rate to 10.5% from 10%. The VA said its home improvement and mobile home rates will also rise by half a percentage point.
"You knock some people out of the market any time there is an increase in rates," said Robert O'Toole, vice president of the Mortgage Bankers Assn. of America.
He predicted rates would rise further because of increased inflationary pressure from a pickup in the economy and worries about the federal budget deficit.
"The housing market is a little soft now. Home buyers are taking a look at the trends and holding back on their purchase decision, but perhaps they should take that step now," O'Toole said.
The Federal Home Loan Mortgage Corp.'s survey of fixed-rate mortgages showed that the average rate rose to 11.18% in the latest week from 11.02% the previous week. Earlier this year, rates fell to under 10% for a 30-year fixed-rate mortgage, the most popular kind.
The average adjustable-rate mortgage edged up to 8.08% from 7.99%, the survey said.