The VA Hybrid ARM is a product that allows a lower fixed rate and payment for the veteran than the more commonly used VA 30 year fixed rate loan or even the 15 year fixed. The initial fixed interest rate will be good for a period of three (3/1 ARM) or five years (5/1 ARM), and then adjusts annually after the designated fixed period. The 3/1 and 5/1 VA Hybrid ARM programs allow up to a 1% annual interest rate adjustment after the initial fixed interest rate period, and a 5% interest rate cap over the life of the loan.
INDEX AND MARGINS
The index is the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year. Also known as the 1-Year Constant Maturity Index. VA ARM loans have either a 2.00% margin or a 2.25% margin.
One percent (1%) annually after the initial fixed rate period of 3 or 5 years. This differs from a conventional ARM or even an FHA ARM loan that has a higher adjustment cap of 2-5%.
The most the interest rate can adjust during the life of the VA ARM loan is 5% above the initial note rate. So for example, if the initial note rate is 3.75%, the very most it could ever be is 8.75% and this could not happen until at least 5 years after the initial fixed rate period.
FIRST ADJUSTMENT DATES
Government loans only adjust 4 times per year (January 1, April 1, July 1, and October 1). The first adjustment will occur within the period that follows the initial fixed period. For example, if the initial period ends in February, the rate will adjust in April and then 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.
Unlike Fannie Mae ARM loans (Conventional) that uses the greater of the fully indexed rate or the note rate + 2.0% to qualify the borrower when the fixed periods are 5 years or less, VA ARM loans use the initial note rate. This is a huge benefit for veterans with higher debt ratios that would not qualify for a loan otherwise.
As an example, let’s say you’re purchasing a new home for $300,000 but for some reason, (high debt balances, single income, tax write offs reduced your yearly income, etc.), you cannot qualify for the higher payment on a 30 year fixed rate loan. So you’re only option is an ARM. With a conventional ARM loan, you would need to qualify on a payment with a rate at least 2% above the initial note rate. So if you could not qualify for the 30 year fixed rate loan, you are sure not to qualify for the conventional ARM loan as that qualifying rate would be at least 1% higher than the fixed rate loan.
- Lower Rate
- Lower Payment
- Lower rate adjustments than Conventional and FHA ARM products
- Easier to qualify for
- Greater monthly savings
All in all, the VA Hybrid ARM is a very good product but if you have a choice, you should consider carefully. Get more information from a VA Loan Specialist and save thousands when you use VAloanlending.com.
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