A Comprehensive Look at VA Adjustable Rate Mortgages (ARMs)
When it comes to finding the funds for your home, if you’re a military borrower, a VA Adjustable Rate Mortgage (ARM) may be an optimal option—especially if you’re still active in the Armed Forces. Part of the distinction between a good rate and a not-so-prime rate is when you’re looking.
First off, recognize that the government places a lot of limitations on VA ARM loans, making them a lower risk option than fixed rate mortgages. Even though, on the surface, fixed rate mortgages are lower risk because they lock in a particular rate for the loan lifetime, an active military service member is often moving around the country, ensuring they have a level of built-in flexibility should they acquire an ARM loan.
An adjustable-rate mortgage carries equal potential for risk and reward. Initially, it is often able to leave more money in your pocket thanks to lower upfront interest rates, which lets you qualify for larger loans. If you’re searching for a loan while rates are already falling or low, this can also position you for greater long-term benefits.
Behind the scenes, an ARM’s interest row adjusts on an annual basis according to a main economic index—usually a Treasury security that’s evaluated on a one, three, or five-year basis. Lenders often create a “margin” for themselves by automatically adding a percentage point or more. So if you know the time period you’ll be stationed at a particular place, and it falls within the one, three, or five year period of your ARM’s economic index, this can give you enough temporary security for it to be a worthwhile risk.
On top of this, there are hybrid adjustable-rate mortgages, where you initially get a fixed-rate interest percentage for a particular length of time (often five, seven, or ten years) before the loan becomes subject to annual adjustments. This ads even more certainty that VA borrowers can take advantage of.
When you are approved for a VA Adjustable Rate Mortgage, you also tap into government-backed borrower protection measures, such as an annual adjustment cap that keeps your first and subsequent annual rate adjustments locked in at a max of 1%. Often the rate cannot go over an increase of 5% for the lifetime of the loan either.
So if you’re a VA and active military borrower, understanding the length of a hybrid ARM’s fixed-rate period and future relocation planning is critical to determining whether an adjustable-rate mortgage or fixed-rate mortgage is right for you.