VA loans allow eligible veterans, active duty service members, and surviving spouses to purchase or refinance a home with a zero percent down payment, competitive interest rates, and more flexible lending requirements.
When you apply for a VA loan, you have two options: adjustable-rate vs. fixed-rate mortgages. Each has its pros and cons and is better suited for some types of borrowers. When determining which type of VA loan is right for you, there are several things to consider, including your budget and whether you want your mortgage interest rate to be predictable throughout the life of the loan.
This article will discuss everything you need to know about VA adjustable-rate mortgages (ARMs) to help you make the right choice of home loan when using your military benefit.
The VA home loan program provides great benefits to eligible veterans, active duty servicemembers, and surviving spouses. One major advantage is the ability to buy a home with no down payment. But does the VA also offer adjustable rate mortgages, also known as ARMs? Let’s take an in-depth look at VA ARMs.
What is a VA Adjustable Rate Mortgage?
A VA adjustable rate mortgage (ARM) is a home loan backed by the US Department of Veterans Affairs with a variable interest rate that may change over time.
VA ARMs start with an initial fixed interest rate and fixed monthly payment for a set period of time, usually 5 years. After the fixed period ends, the interest rate can adjust up or down based on market conditions. The monthly mortgage payment will also adjust to match the new rate.
VA ARMs are a type of hybrid ARM, meaning they have characteristics of both fixed rate mortgages and adjustable rate mortgages:
- Fixed rate and payment for the first 5 years
- Interest rate and payment adjust annually after the fixed period
- Loan term is 30 years
VA ARMs can be an attractive option for some borrowers because the initial interest rate is usually lower compared to fixed rate mortgages. However, the rate and payment are not guaranteed to stay low and can increase substantially over the life of the loan.
How Do VA ARMs Work?
While lenders have some flexibility with VA ARM programs we’ll use the common 5/1 VA ARM as an example
- 5 – The interest rate is fixed for the first 5 years of the loan.
- 1 – After the 5 year fixed period, the interest rate adjusts annually based on current market rates.
The annual adjustments are tied to an index usually the 1-year Constant Maturity Treasury (CMT) rate. A margin is added to the index value to determine your new rate for the next 12 months.
For example, if the CMT index is 2% and your margin is 25%, your new rate would be 45% (index + margin). The rate can adjust up or down each year depending on index movement.
VA ARM loans also have interest rate caps that limit rate changes:
- 1% annual cap – max rate change up/down at first adjustment
- 1% annual cap – max change for subsequent adjustments
- 5% lifetime cap – max rate increase over life of loan
Your monthly payment will be recalculated each time your rate changes, factoring in the remaining loan balance and term.
Pros and Cons of VA ARMs
VA adjustable rate mortgages come with unique advantages and drawbacks compared to traditional fixed rate home loans.
Pros
- Lower initial interest rate and monthly payment
- Pay off more principal during fixed period due to lower rate
- Built-in rate caps protect against runaway increases
- Can refinance to fixed rate later if rates rise
Cons
- Payment uncertainty after fixed period
- Caps limit how much rates can decrease
- Risk of payment shock if rates rise rapidly
- Must maintain good credit for refinance options
For some borrowers, the lower initial rates and payments of a VA ARM provide enough savings to offset the risks of rising rates later. But it’s important to consider your timeline and risk tolerance.
How to Calculate VA ARM Payments
You can calculate your initial VA ARM payment using the starting interest rate, loan amount, and loan term:
Initial VA ARM Payment = Principal & Interest Based on Starting Rate
For subsequent payments after the fixed period:
Adjusted VA ARM Payment = Principal & Interest Based on New Rate
To estimate potential payment increases, calculate payments using the maximum lifetime interest rate cap. This will give you a worst case payment scenario.
You can easily calculate payments using an online mortgage calculator.
How to Qualify and Apply for a VA ARM
The VA itself does not directly offer mortgage loans. You must apply through a private lender that participates in the VA home loan program. Here are some tips for getting a VA ARM:
- Check your VA home loan eligibility
- Research VA ARM rates and terms from multiple lenders
- Get pre-approved to show sellers you are ready to buy
- Provide documents to verify income, assets, and VA eligibility
- Go through underwriting where the lender will confirm you qualify
- Lock in an interest rate after finding a home
- Complete the loan process with title work, appraisal, etc.
- Close on your new home!
Work with a reputable VA-approved lender to ensure you get the best VA ARM program for your needs. Rates and closing costs can vary significantly between lenders.
The Bottom Line on VA ARMs
Adjustable rate mortgages can offer lower initial rates but also come with additional risks compared to fixed rate home loans. It’s important to think about your goals and financial situation when deciding if a VA ARM makes sense.
Here are a few final tips on VA ARMs:
- Consider a fixed rate if planning to stay in the home long-term
- Use ARMs for flexibility or if you may move within 5-7 years
- Don’t rely only on initial low payments when budgeting
- Factor in taxes, insurance, HOA fees on top of principal/interest
- Maintain good credit and cash reserves at all times
- Evaluate refinance options before rate adjustments
While not right for everyone, VA adjustable rate mortgages can provide a lower cost path to homeownership for creditworthy borrowers comfortable with interest rate variability. Do your research to see if a VA ARM fits your home buying needs and financial situation.
Calculating VA ARM Loan Payments
Calculating VA ARM loan payments can be confusing because you ultimately won’t know the market conditions until they happen. To calculate your payments, you must know your initial rate, balance, and term length. You’ll also need to know the new interest rate, your remaining balance, and how many years you have left on your mortgage.
When you apply for an ARM loan, you’ll receive a loan estimate from the lender, which will give you information about the loan, including projected payments based on changes in your interest rate. This estimate can help you determine how much you’ll pay after the initial introductory period is over and every year after that.
The formula for calculating your VA ARM payments is as follows:
- P= Monthly payment
- L= Loan amount
- c= interest rate (annual rate divided by 12)
- n= number of months in the loan
During the first five years of a $200,000 loan, you have a fixed interest rate of 3%. Using this formula, your monthly payment is $843. Now, let’s say that after 5 years, you have around $188,000 remaining on the loan.
Now, you have 25 years left on the loan and a 4% interest rate after the introductory period. To find your new payment, you’ll use the formula again, but with the number of years left on the mortgage. Your new monthly payment is $1,056.
Applying for a VA ARM Loan (& How We Can Help)
Griffin Funding streamlines the VA ARM loan application to help you determine your eligibility. After our initial discovery meeting, we’ll determine if a VA ARM loan is right for you before getting you pre-approved for a loan.
After you find your dream home, you can begin the application online or contact us to help you through the process. After we receive your application, we’ll perform underwriting to ensure you qualify for a loan and determine your interest rate and loan amount.
Griffin Funding works with our borrowers to ensure you provide us with the necessary paperwork and information to streamline the underwriting process and help you get faster loan approval. Additionally, we’re always here to answer your questions and ensure you have a positive experience when shopping for your next home.
Is a 5/1 Adjustable-Rate Mortgage (ARM) a Good Idea?
FAQ
Can a VA loan be an ARM loan?
What is the current VA ARM rate?
What is a hybrid ARM VA?
Is it harder to qualify for an ARM loan?
Are VA home loans better?
So yes, VA loans are easier to qualify for when it comes to debt and credit scores, but perhaps not as easy as VA promotional material may have you believe. Another plus for the VA: It likely will have a lower interest rate than a conventional loan.
What is a VA military loan?
What Is a VA Loan? A VA loan is a mortgage loan that’s backed by the Department of Veterans Affairs (VA) for those who have served or are presently serving in the U.S. military.
What is VA IRRRL benefit?
The primary purpose of a VA IRRRL is its immediate monetary benefit. By lowering your current fixed-rate or converting an adjustable interest rate to a fixed rate, the loan also reduces your monthly installments, making it easy for you to afford the loan.
What is the VA loan rate?
The exact interest rates and terms you will receive depend on your credit score. Borrowers with credit scores of 720 can receive an interest rate of 4.375% and an APR of 4.725% on 30-year fixed VA purchase loans. You can use the tool on the Veterans United home loans website to calculate your rates based on your credit score.