VA Loans – ARM


VA (Veteran’s Administration) loans are for those men and women who are serving or have served in our Nation’s Armed Forces. These loans are backed by HUD (Housing and Urban Development) and offer special benefits to those who are eligible.

Guidelines and Parameters

A VA ARM has two components—the first number represents how long the interest rate will remain fixed, or that the interest rate will not change for that period of time.  The second number tells you the length of time and frequency the loan will adjust once the variable portion kicks in. Like traditional ARMs, VA ARMs use predetermined caps and margins that work in concert with monetary fund indexes to establish the interest rate when the loan adjusts.  VA ARMs differ from their conventional counter parts in that the margins and caps in place are typically lower and offer a greater benefit to the qualified candidate.  Currently the VA offers this ARM type:

  • 5/1 ARM: Your interest rate is set for 5 years then adjusts for 25 years.

Who Is It Right For?

VA ARMs are ideal for homebuyers who:

  • Understand that their rate may increase after the initial period.
  • Don’t anticipate holding on to the property for the full term of the mortgage.
  • Expect their income to increase in the next couple of years.
  • Want the benefit of a lower initial rate and monthly payment.

Unlike the FHA ARM loans, VA ARM mortgages can go to up to 100% loan to value based on your loan amount.  Another plus on the VA ARM is the lack of mortgage insurance for the loan regardless of the final loan to value.  All VA loans have a funding fee based on your eligibility entitlement (unless disabled in which case the funding fee is waived). The funding fee can vary from loan to loan based on your record of service, if you are using your VA eligibility for the first time or some other mitigating factor. VA adjustable rate mortgages have predetermined limits for the periodic and lifetime caps when the loan reaches its adjustable stage.

All ARM’s contain these first three features.

An adjustment schedule

This schedule is indicated in the mortgage contract and changes in the rate charged on an ARM loan—occurring at the end of each adjustment period. Adjustment periods occur in equal intervals depending on the kind of ARM selected (1 year, 3 year, 5 year, etc.).

Index

Every ARM is linked to an index that increases or decreases in tandem with the overall movement of interest rates. The index is what is used to determine the new loan rate for each adjustment period.

An adjustment margin

While the loan rate and index rate move together they are not the same. The margin is the percentage amount that a lender adds to the index rate when calculating an ARMs new interest rate at each adjustment period.

Qualifying for an ARM

Qualifying for an adjustable rate mortgage may vary based on the term of the ARM that you choose.  Speak to one of our mortgage experts for more information on this and the programs it affects.

Fixed Rate

Pros

  • Predictability. Homebuyers know how much interest there is to pay over the term of the loan.

 

  • Monthly payment is fixed and in early years consists primarily of tax-deductible interest.

 

  • Mortgages without prepayment penalties permit homebuyers to shorten the term of the loan at will by making periodic payments against principal—and, ultimately, lowering interest costs.

Cons

  • Stability comes with a price; interest rates on fixed rate loans are generally higher than starting rates on ARMs.

 

  • If you choose a low down payment option you may have to pay for mortgage insurance, which adds an additional monthly fee to protect the lender from risk of loss.

Adjustable Rate Mortgage

Pros

  • Lower initial rate and payment amount, this means you may be able to buy a larger home than you originally believed.

 

  • If mortgage rates fall borrowers need not refinance to take advantage of them, instead they are automatically lowered.

 

  • If borrowers choose an ARM and save money it creates a way to invest more. If a borrower saves $100 a month in an account rather than putting it towards a mortgage payment it yields a higher investment interest.

 

  • If a borrower does not plan on living in one place for long an ARM can offer an inexpensive way to purchase a home.

Cons

  • Rates and payments can increase drastically over the life of the loan. A 6 percent ARM could end up at 11 percent in just three years if rates continually increase.

 

  • The initial adjustment can come as a surprise.

Long Term

Pros

  • Predictability. Homebuyers know how much interest there is to pay over the term of the loan.

 

  • Monthly payment is fixed and in early years consists primarily of tax-deductible interest.

 

  • Mortgages without prepayment penalties permit homebuyers to shorten the term of the loan at will by making periodic payments against principal—and, ultimately, lowering interest costs.

Cons

  • This stability comes with a price; interest rates on fixed rate loans are generally higher than starting rates on ARM’s.

 

  • If you choose a low down payment option you may have to pay for mortgage insurance, which adds an additional monthly fee to protect the lender from risk of loss.

Short Term

Pros

  • Principal balance is reduced relatively rapidly compared to longer-term loans.

 

  • Permits outright home ownership in half the time with half the cost of interest of a 30-year fixed.

 

  • May have lower interest rates than a 30-year fixed and therefore offers a useful financial planning tool.

Cons

  • Higher monthly payments than those on a 30-year fixed make these loans more difficult to qualify for.

 

  • Choosing a loan with a shorter amortization period reduces the number of homes an individual can afford to buy.

 

  • Monthly payments are roughly 15%-30% higher than they would be on a comparable 30-year fixed.

Bi-weekly fixed rate

Pros

  • Biweekly payment schedule speeds up amortization, interest costs, and shortens the loan term generally to between 18 and 22 years. Homeowners make 26 biweekly payments (13 annual).

 

  • Conversion to a 30 year fixed is generally permitted.

 

  • Lowers interest expense.

Cons

  • There is generally an additional charge for this service thus making it a very costly way to shorten the life of the loan and lower the interest expense.

 

  • The same effect can generally be achieved by obtaining a 30 year fixed mortgage and simply making an additional payment or two each year or by applying an additional sum to principal repayment when homeowners make a monthly payment.

 

  • As with other rapid-payoff mortgages homeowners trade total interest-cost reductions for reduced tax benefits.

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