An ARM, or adjustable rate mortgage, is a mortgage in which the interest rate of a loan changes after a specific period of time, as opposed to a fixed rate mortgage, or FRM, in which the rate stays the same through out the life of the loan. With a VA Hybrid ARM, similar to other Adjustable Rate Mortgages, the rate is fixed during the first period of the loan but will change as the interest rate index adjusts. The main difference is, this adjustment is much lower at a maximum of one percent per year.
Fixed Periods of Hybrid ARMs
VA Hybrid ARM rates quoted by a broker or loan agent are the rates at which the ARM will stay for a period of time during the beginning of the loan. Although it is significantly lower in rate, this "fixed" period can last between three years or five years and is dependent on the movement of the Treasury index.
Typically, Hybrid ARMs change once a year if at all. Again, it’s dependent on the Treasury index. Often times there are no changes at all. With other ARM products it is possible for the ARM to adjust within a shorter or longer period than a year. This being said, ARM agreements are flexible and the rate of change can follow a specific creative pattern. For example if your home loan agreement states you will have a 5/1 ARM, this means the original interest rate will be locked in for 5 years. After the initial 5 years the rate will change annually. The Hybrid ARM works the same with the exception of when the adjustment period is determined.
A Hybrid ARM, like all government loans, have adjustment periods that can occur 4 times per year (January 1, April 1, July 1, and October 1). The first adjustment can occur within the period that follows the initial fixed period. For example, if the initial fixed period ends in March, the rate will adjust in April. It then can change annually thereafter until maturity.
3/1 VA Hybrid ARM: the first rate adjustment will occur between the 36th and the 42nd payment due date.
5/1 VA Hybrid ARM: the first rate adjustment will occur between the 60th and the 66th payment due date.
VA Hybrid ARMs are not for everyone. More often than not, they are available for veterans or service members that may have plans to sell within five to seven years. They are especially popular for military service members with high probability of Permanent Change of Station (PCS) transitions.
In either case, Hybrid ARMs, like any adjustable rate mortgages, should be carefully researched and considered before pursuing. They are not designed as a permanent fix like FRM's.
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For more information about Hybrid ARMs visit http://www.benefits.va.gov/phoenix/pdf/rlc/arms_and_hybrid_arms.pdf.