Most people are still very cautious when it comes to adjustable rate mortgages (ARMs).
Things have changed a lot after the mortgage meltdown. Risky, predatory loan products with pre-payment penalties have long since been eliminated.
The VA hybrid ARM can be an excellent tool as long as you understand its strengths and weaknesses. It is not the type of loan to get in this market if you expect to live in the home for many years to come – a 30 year fixed low-interest rate would be a much better choice.
How does a VA Hybrid ARM work?
The VA hybrid ARM is a 30year loan. Your interest rate will remain unchanged for the first 5 years, after which it will start adjusting once every year, based on the movements of the Constant Maturity Treasury index (CMT). This is an index with a very stable history of fluctuations.
Your mortgage interest rate can both increase and decrease, but only by 1% at a time. The increase is capped at a maximum of 5% over your initial starting rate.
The starting interest rate on a VA ARM is usually about 1% lower than the 30year fixed rate, offering a significantly lower monthly payment advantage.
When would a VA Hybrid ARM benefit you?
- If your income is expected to increase significantly in the next years, a lower initial payment may come in handy
- If you don’t expect to occupy property for more than 5 years, or are planning to refinance before the loan starts adjusting
- If you’re looking to pay down the loan faster, but don’t have a predictable monthly income, so a 15-year loan payment would be a bit too high to afford.
The downside of a VA Hybrid ARM loan
Your interest rate is likely to go up with time, and so will your mortgage payment. People on a fixed budget will find this stressful.
My advice is to keep an open mind and consider all possibilities. The important thing is to focus on the right solution for your particular situation.