Does the mere thought of an Adjustable Rate Mortgage (ARM) make you want to run for cover? If so, you are not alone. The misuse of these once highly popular mortgage products has caused the most devastating economic crisis seen in recent years. With the economy still suffering some of the after effects of the housing crisis, many are still quite skeptical of Adjustable Rate Mortgages. If ARMS are so risky, why then, you might be asking would the Department of Veterans Affairs offer such a product? Well, the fact of the matter, is that Hybrid ARM?">VA Hybrid ARM are more thoroughly regulated, and are designed to help, not harm homeowners. Below are some facts about the VA Hybrid ARM that will help take the fear and confusion about this product.
What is the VA Hybrid ARM?
The VA Hybrid ARM is a somewhat new product that offers a fixed rate for a period of time, then adjusts up to a maximum of 1% after the fixed period. This allows the veteran to lock a lower interest rate and keep that rate for a fixed period of time. After the fixed rate period, the loan can adjust up or down depending on the market conditions.
How Does the Interest Rate Adjust?
With a VA Hybrid ARM, the interest rate remains locked or fixed for a certain period of time, usually 3, 5, or even 7 years. After this fixed period, the rate can adjust up or down. According to the Department of Veterans Affairs, the interest rate adjustment must occur on an annual basis, with the exception of the first adjustment, which can not occur sooner than 36 months on a 3/1 ARM or sooner than 60 months on a 5/1 ARM. The interesting thing about the VA Hybrid loan that should immediately make this product different from ARM products of the past is that the VA caps the annual adjustment at 1%. In addition, the lifetime CAP on the loan is 5%. In this manner, the VA helps to minimize the risk that the increase in the interest rate will vary so drastically as to make the payment wildly out of the homeowners budget at some point in the future.
What are the PROS and CONS of the VA Hybrid ARM?
Military families often do not remain in the home for longer than 5-7 years. With this product, the veteran can reap the benefit of affordable housing at a low fixed rate, and sell the home before the rate adjustment period. In addition, the Hybrid ARM is a good candidate for those looking at Jumbo VA Loans. With a Jumbo VA Loan, having a fixed low interest rate can make housing in an otherwise high cost area much more affordable for military families. The downside to this product is that just like the ARM products of the past, the interest rate increase can shoot the housing payment beyond the veterans budget. The stress and uncertainty of this alone may make some reconsider the use of this mortgage product.
Is a VA Hybrid ARM Right For You?
Deciding on a mortgage is a deeply personal decision that can only be made by a thorough examination of your financial situation. In making this decision, it is important to assess the the possibility of the rate adjustment making the home beyond the means of your budget. Will you be able to continue to afford your home after the rate adjustment? Certainly the rate could go down depending on the market, but is that a risk you are willing to take? The VA has done a great deal of due diligence in designing a product that will help make home ownership affordable for military families. Although there are still some risks involved, there are also plenty of other reasons why this product, in its newest form still makes sense.