A decision you’ll have to make is whether you want a fixed or adjustable interest rate for your VA loan.
A fixed-rate loan is exactly what it sounds like: Your interest rate doesn't change for the life of the mortgage. That means the loan's principal and interest payments won't change, either. There are multiple flavors of adjustable-rate mortgages, but the common tie is that your interest rate can change, which means so will your mortgage payments.
There are benefits to both fixed-rate and adjustable-rate VA mortgages, based on what you’re looking for and your unique financial needs. Here’s a quick look at how ARMs compare with fixed-rate mortgages.
With a traditional VA ARM, you have a set interest rate for the first year of the mortgage term. After that, the rate can adjust annually, based on what's happening in the market. All government-backed loans feature a 1/1/5 interest rate cap. This means the first interest rate adjustment cannot be more than 1 percent; subsequent bumps cannot exceed 1 percent; and a maximum of 5 percentage points can be added during the loan’s life.
VA adjustable-rate mortgages are riskier than a fixed-rate loan by definition but can yield more potential reward. ARMs usually originate with an interest rate lower than that of a fixed-rate mortgage, which means more cash for the borrower from the onset. That extra money could allow for a larger loan amount. However, it’s very important to plan carefully when considering an ARM, as the housing market is always in flux.
While uncertainty is the main con of ARMs, these mortgages are a great option for some. This type of loan can be rewarding, especially when used in conjunction with a program like the VA Streamline Refinance, which lets you take advantage of home equity and low rates at the same time.
The traditional fixed-rate VA loan has a set interest rate that does not change. This is great for those who prefer stable, predictable VA home loan payments over the lifetime of the loan. Economic shifts won’t impact the interest rate or principal payment with this kind of loan, so it is a good option for risk-averse borrowers.
Fixed-rate VA loans may be ideal for homeowners who don’t plan on relocating and like to know exactly what they’ll pay every month. Note that the only way to change the interest rate and the principal amount with this loan type is through a refinance.
Want the security of a fixed rate but the potential reward of an ARM? Enter the Hybrid ARM Loan. Hybrid ARMs are offered with a fixed interest rate, usually for at least three years. After that, the rate can be adjusted on an annual basis. Like traditional VA ARM loans, the cap is 5 percent over the lifetime of the loan. Both the introductory fixed interest rate and traditional ARM interest rate caps offer initial security. Hybrid ARM VA loans may suit military homeowners who expect a relocation in the near future.
For example, the fixed-rate period enables some active duty homeowners to build equity and stash cash before a Permanent Change of Station. Then, once the adjustable rate kicks in, the homeowner can refinance for a new home purchase or possibly use the remaining VA entitlement for a second home loan.
|Lower initial interest rates
|Smaller monthly payments
|Hard to budget efficiently
|Great for relocation
|More complex than fixed-rate
|Reliant on current mortgage market
The benefits of VA adjustable-rate mortgages truly depend on your individual situation. Keep an eye on how fixed rates compare to ARM rates on any given day, too.
Yes. A VA loan may be partially or fully paid at any time without penalty. VA loans have long allowed Veterans to avoid prepayment penalties.
No. It is common practice in the mortgage lending industry to sell mortgages and mortgage servicing rights, often before the first payment is even due. Lenders are required to notify you in advance if this happens. Mortgage transfers cannot affect the loan amount, interest rate or other details of your mortgage loan.
No. A Veteran may sell the property to a Veteran or non-veteran at any time. However, if the loan was closed after March 1, 1988, and it will be assumed, the qualifications of the assumer must be reviewed and approved by the lender or VA.
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