Are you in the market for a new home loan but can't decide whether to use a fixed or adjustable mortgage (ARM)? If you want the potential of lower payments over time, then a variable rate ARM could be just what you need.
This blog post'll discuss VA ARMs, including their work and common features on these loans. We'll also cover their advantages and disadvantages compared to other loan types so that you can make an informed decision when selecting your next mortgage.
Read on to find out more about VA ARMs!
What Is a VA Adjustable Rate Mortgage
A VA Adjustable Rate Mortgage (ARM) is a home loan offered to eligible veterans, active-duty military personnel, and their spouses by the U.S. Department of Veterans Affairs (VA).
Unlike a fixed-rate mortgage, where the interest rate remains constant for the entire loan term, an adjustable-rate mortgage has an interest rate that can fluctuate over time.
Here are some key features of a VA Adjustable Rate Mortgage:
Initial Fixed-Rate Period
The loan typically starts with an initial fixed-rate period, which can vary (e.g., 3 years, 5 years, 7 years, etc.). The interest rate remains fixed during this period, providing stability and predictable monthly payments.
Adjustment Period
After the initial fixed-rate period, the interest rate on a VA ARM can adjust periodically. The adjustment period determines how often the rate can change. Common adjustment periods are one year (annual), three years (triennial), or five years (quinquennial).
Index and Margin
The interest rate adjustments for a VA ARM are based on a specific financial index, such as the U.S. Treasury Securities index or the London Interbank Offered Rate (LIBOR). The lender adds a margin, a predetermined percentage, to the index rate to calculate the new interest rate.
Interest Rate Caps
VA ARMs often have caps that limit how much interest rates can change during a specific period. These caps can include an initial adjustment cap (limiting the first rate adjustment after the fixed-rate period) and periodic adjustment caps (limiting subsequent rate adjustments).
Lifetime Cap
VA ARMs typically have a lifetime cap, which sets the maximum interest rate that can be charged over the life of the loan. This cap provides borrowers with protection against significant interest rate increases.
How to Do VA ARM Loans Work
VA ARM loans, or VA Adjustable Rate Mortgages, work by providing eligible veterans, active-duty military personnel, and their spouses with a home loan that features an adjustable interest rate.
Here's how VA ARM loans typically work:
Eligibility
Borrowers must meet the eligibility requirements set by the U.S. Department of Veterans Affairs (VA). These requirements include serving a certain length of active duty or being a veteran with an honorable discharge, among other criteria.
Loan Application
Borrowers must apply for a VA ARM loan through a VA-approved lender. The lender will evaluate the borrower's creditworthiness, income, and other factors to determine their eligibility for the loan.
Loan Terms
The loan terms for a VA ARM loan include the following:
- The initial fixed-rate period.
- The adjustment period.
- The index and margin.
- Any caps on interest rate adjustments.
These terms will be outlined in the loan agreement.
Initial Fixed-Rate Period
The VA ARM loan starts with an initial fixed-rate period, which can vary (e.g., 3 years, 5 years, 7 years, etc.). The interest rate remains fixed during this period, providing stability and predictable monthly payments.
Adjustment Periods
After the initial fixed-rate period, the interest rate on a VA ARM loan can adjust periodically. The adjustment period determines how often the rate can change. Common adjustment periods are one year (annual), three years (triennial), or five years (quinquennial).
Interest Rate Adjustments
The interest rate adjustments for a VA ARM loan are based on a specific financial index, such as the U.S. Treasury Securities index or the London Interbank Offered Rate (LIBOR).
The lender adds a margin, a predetermined percentage, to the index rate to calculate the new interest rate.
Interest Rate Caps
VA ARM loans often have caps that limit the amount the interest rate can change during a specific period. These caps can include an initial adjustment cap (limiting the first rate adjustment after the fixed-rate period) and periodic adjustment caps (limiting subsequent rate adjustments).
Lifetime Cap
VA ARM loans typically have a lifetime cap, which sets the maximum interest rate that can be charged over the life of the loan. This cap provides borrowers with protection against significant interest rate increases.
Payment Changes
The borrower's monthly mortgage payment may change when the interest rate adjusts. If the interest rate increases, the payment may also increase, while a decrease in the interest rate may result in a lower payment. Borrowers should be prepared for potential payment fluctuations.
Loan Servicing
After closing the loan, the borrower will make mortgage payments to the loan servicer, which may be the original lender or a different entity responsible for managing the loan.
How Are VA ARM Rates Determined
VA ARM rates are determined by various factors, including the financial index used to calculate the interest rate and any caps that limit how much it can increase or decrease. Borrowers should compare VA ARM loan options from different lenders to find the best deal.
Fixed-Rate vs. ARM VA Loans
Fixed-Rate VA Loans and Adjustable Rate Mortgage (ARM) VA Loans are available to eligible veterans, active-duty military personnel, and their spouses for financing a home purchase. A fixed-rate VA loan offers stability and predictability as the interest rate remains constant throughout the loan term.
This means borrowers can budget confidently, knowing their monthly mortgage payment will remain unchanged. Fixed-rate VA loans are ideal for those planning to stay in their homes for longer or prefer the security of a fixed payment.
On the other hand, an ARM VA loan starts with an initial fixed-rate period, typically ranging from 3 to 10 years. During this period, borrowers enjoy a stable interest rate and predictable payments. After the initial fixed-rate period, the interest rate on an ARM VA loan adjusts periodically based on market conditions.
ARM loans usually have lower initial interest rates than fixed-rate loans, resulting in lower monthly payments. However, it's important to note that the interest rate on an ARM loan can fluctuate over time, potentially increasing the monthly payment.
ARM VA loans are suitable for those who plan to sell or refinance their homes before the initial fixed-rate period ends or anticipate changes in their financial circumstances shortly.
FAQs
What is a VA 3 1 hybrid ARM?
A VA 3 1 hybrid ARM is an adjustable-rate mortgage loan designed for veterans and military personnel. This type of loan provides borrowers the benefit of locking in a low initial interest rate for three years, followed by annual adjustments to the interest rate based on prevailing market rates.
What is the meaning of ARM in a mortgage?
ARM stands for an adjustable-rate mortgage. This type of loan offers borrowers an initial period of fixed interest rates, followed by annual adjustments to the rate based on prevailing market conditions.
What is better, ARM or fixed rate?
The best option for you depends on your goals and financial situation. An ARM loan may be advantageous if you plan to move or refinance within a few years, as it offers lower initial rates than fixed-rate loans. On the other hand, a fixed-rate loan may be beneficial if you want more stability and predictability in your monthly payments.
Conclusion
VA Adjustable Rate Mortgages (ARM) are a great option for veterans looking for a loan they can trust. Not only do VA ARMs provide fixed-rate protection, but they also offer lower monthly payments and the potential to save money over time.
Are you ready to learn more about what VA ARMs are? We are here every step of the way to help ensure you get the right loan option, so don't hesitate to reach out today!
