Matching a borrower with the right VA Loan option can be a dizzying process. Every case is different, and it can be difficult to predict a person’s financial future. This uncertainty motivates many active duty and retired veterans to learn about the benefits of VA Hybrid Adjustable Rate Mortgages (ARMs).
What is a VA Hybrid ARM?
A VA Hybrid ARM incorporates the characteristics of fixed rate and adjustable rate loans. Initially, the interest rate is fixed, but after a period of three, five, seven or 10 years, the rate is adjusted based on the 1-Year Constant Maturity Index. The interest rates for VA Hybrid ARMs fluctuate only 1 percent each year.
Are there different types of VA Hybrid ARMs?
Yes. There are two types of VA Hybrid ARMs: the 3/1 and the 5/1. Both allow a 1 percent annual interest rate adjustment after the fixed interest-rate period. Also, both options cap the interest rate at 5 percent during the life of the loan. Interest rate adjustments occur annually, except for the initial adjustment. In a 3/1 ARM, the first adjustment may occur 36 months after the first payment. In a 5/1 ARM, the initial adjustment may occur after 60 months.
What are the benefits of VA Hybrid ARMs?
During the initial period of a VA Hybrid ARM, the interest rate is generally lower than those of fixed rate mortgages. A shorter fixed-rate period means a lower starting interest rate. However, borrowers who predict a spike in interest rates should apply for a longer fixed-rate term.
Compared to most conventional loans, VA Loans have excellent refinancing options. With a VA Hybrid ARM, eligible borrowers will have the option of refinancing after the fixed-rate term. This can help them avoid the higher interest rates of adjustable mortgages.
Generally, the cost of a VA Hybrid ARM is less than a VA Fixed Rate Mortgage over the life of the loan.
Contact one of our loan consultants to learn more about this program.