The VA Hybrid (ARM) Loan

What is the VA Hybrid Loan?

The VA Hybrid Loan, also known as the VA Hybrid ARM, is a loan program that combines fixed and adjustable rates into one loan. Borrowers know there are pros and cons to adjustable and fixed rates. Fixed rates feel safer for many homeowners while many like how adjustable rates can take advantage of interest drops in an ever-changing market.

As a veteran homeowner, you don’t necessarily have to choose between the two. The VA Hybrid ARM takes the stability of the thirty-year fixed-rate mortgage and the savings opportunities of the lower, adjustable-rate mortgage and combines them. Together, lower rates and greater stability come to equal one of the most sought-after loans in the VA mortgage industry: the VA Hybrid. The Hybrid loan can be described as 1+1=3: you take the best of both loan worlds to create a more flexible, truly beneficial loan.

What is the Difference Between a VA ARM and a VA Hybrid Loan?

Many veterans used to get VA ARM loans, in which the initially-low interest rate starts to change every year after the first year. Veterans had to deal with the uncertainty of a new mortgage payment amount every year.

Now VA Hybrid loans allow a period of several years in which the interest rate stays the same, making your payments predictable. Also, VA Hybrid loan rates are low. For example, if a conventional 30-year mortgage has an interest rate of 4.3 percent, a 5/1 VA Hybrid ARM might have an interest rate of 3.6 percent.

How Much Can My Mortgage Payments Increase During the ARM Period?

VA Hybrid ARM loans have a 1/1/5 cap set by the government, which means:

  • The interest rate can increase by a maximum of 1 percent during the first adjustment.
  • The interest rate can increase by a maximum of 1 percent during each annual adjustment after the first.
  • The interest rate will never increase by more than 5 percentage points during the life of the loan.

So, imagine you have a 3/1 Hybrid loan of $100,000 with an interest rate of 2.5 percent and a monthly payment of $500.

After 3 years, the VA Hybrid loan rate may rise by 1 percent to 3.5 percent, increasing your monthly payment to about $553. The highest interest rate you could ever have would be 7.5 percent, increasing your monthly payments to about $804.

How Can I Prepare for the Change to the ARM Period?

Many veterans refinance their VA Hybrid ARM before the VA Hybrid loan rate changes, avoiding the adjustable-rate period entirely. You can also check the Treasury index to see if rates are moving higher and decide if you can deal with any higher payments that result. Finally, you can build up savings while your interest rate is lower to prepare for higher rates.

Remember, you need to make sure you qualify for a refinance loan and must have a steady income. It also helps if you’ve kept a good credit record leading up to the refinance and if your other expenses are kept in check. You might also want to avoid taking on more debt—for example, for a new car.

How Does the VA Hybrid Loan Work?

A conventional adjustable-rate mortgage (ARM) changes rates frequently. These changes are normally based on volatile foreign financial indexes. The VA Hybrid loan, on the other hand, has one longer fixed period in the beginning. It’s not affected by these indexes nearly as often as is a conventional ARM loan. According to policy, both the VA Hybrid and VA ARM loans will adjust rates only once per year.

Additionally, while many conventional loans are affected by domestic and foreign indexes, the VA Hybrid ARM loan is only tied to the stable U.S. Treasury Index. Hybrid ARM loans also carry guaranteed rate caps. Rate caps ensure that interest rates increase by no more than 1 percent per year. In doing so, they protect borrowers from skyrocketing rates and add greater security to a loan. The rate caps on a VA ARM or Hybrid loan will stay in place for the entire life of the loan. All in all, Hybrid loans help veteran homeowners take advantage of rates much lower than those attached to your conventional 30-year fixed mortgage. Not to mention, the Hybrid loans carry no additional charges or hidden fees. 

The benefits of a VA Hybrid Loan include:

  • Higher Monthly Savings -  Lower rates help Veterans on fixed incomes save the most amount of money each month.
  • Faster Debt Reduction - Significantly lower start rates provide veterans more money to pay down higher interest rate debt.
  • Accelerated Mortgage Payoff - Savings applied to the principal balance help Veterans pay off their homes even faster with no change in current monthly payment.
  • Guaranteed Limits in Rate Adjustments - After the fixed rate period expires, the rate may only adjust once per year and by no more than 1%.
  • Faster Breakeven Periods - Lower rates with no additional fees compared to traditional fixed rate options mean the VA Hybrid loan pays for itself even faster.
  • Potential Rate Decreases - VA Hybrid loans adjust upward AND downward depending prevailing index rates.  Many veterans in VA Hybrid loans now in adjustment have seen their rates decrease in recent years.
Most popular option among veteran homeowners

The 5/1 Hybrid Loan

When you see a 5-1 Hybrid loan, this means that the loan carries a fixed rate for 5 years and that the rate changes in 1-year increments after that period. 5-1 Hybrid loans are the most popular Hybrid options among veteran homeowners, especially those who think they’re likely to sell or refinance their homes within the next 8 years, such as growing families or empty-nesters. These homeowners don’t expect to be in the same house or with the same mortgage for very long, so the 5-1 Hybrid loan ensures five years of a good rate and predictable payments, with the possibility of transitioning into a better rate down the road.

Lowest start rate and payment.

The 3/1 Hybrid Loan

The 3-1 Hybrid loan is just like the 5-1 except that it guarantees fixed rates for 3 years. The 3-1 Hybrid program has low start rates of any VA loan available. Veterans who plan on selling or refinancing within as little as 5 years normally take advantage of the 3-1 Hybrid loan. This loan is also a good option for veterans dealing with heavy amounts of debt or for those who move around a lot for work. Active duty military personnel expecting to be transferred find their needs are well accommodated by the 3-1 Hybrid loan.



Learn More About the VA Hybrid Loan

Loan officers at Low VA Rates are committed to any loan program that helps veterans save money on their mortgages. We believe the VA Hybrid Loan is one of these great programs designed to put more money in the veteran’s pocket and help them pay off their home faster than they might otherwise with a conventional loan. If you would like to learn more about the VA Hybrid loan give us a call now at 866-569-8272.

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