There’s a lot to say about hybrid ARMs, and a lot of content has been written about them in a lot of different places. In this article, we’re going to try and condense all of that information and summarize it into the stuff you need to know. We’ll discuss how and why a VA hybrid ARM is cheap, fast, and most importantly, safe.
VA hybrid ARMs are cheap
As of the writing of this article, you can get a hybrid ARM from us at a starting interest rate of 2.25% for a 3/1 ARM, which means it stays fixed for the first 3 years. That comes with a 2% margin, which means that if your 3/1 ARM ended this week, your new interest rate would also be 2.25% (margin+CMT index, which is currently at 0.25%). Also, whether you’re refinancing into an ARM or doing a new purchase loan with an ARM, your closing costs are going to be a lot lower than they would be for a fixed-rate. As to why this is the case, your guess is as good as mine. It’s the same way in the conventional loan program. A loan officer would likely be able to explain why.
Because your interest rate is so low, your monthly payment will also be much lower than on a fixed-rate. This gives you two options: pay more than the minimum or use the extra money for something else. If you choose to pay more than the minimum, you’ll love it when the interest rate starts to adjust annually. Why? Because the loan reamortizes every time the interest rate adjusts, which means you’ll get a new monthly minimum based on how much you still owe on the home. Talk to one of our loan officers to learn more about reamortizing.
VA hybrid ARMs are fast
If you’re refinancing from a different VA loan, you can use the VA streamline (IRRRL) to do the refinance, which means you can get an ARM in as little as 10 days if you have all the paperwork ready (which isn’t much). Even if you’re doing a new purchase loan, or refinancing with a cash-out refinance, an ARM can be faster and easier to qualify for than a fixed-rate since the starting interest rate and monthly payment is so much lower. There may be concerns if your current income would not be sufficient to cover the highest possible monthly payment, but those will be addressed throughout the loan application process.
VA hybrid ARMs are safe
This is the one that catches most people by surprise. In many ways, hybrid ARMs are safer than a 30-year fixed rate. Hybrid ARMs are fixed for an initial period, usually 3 or 5 years. Many people think that after the initial fixed period, all hell will break loose and they’ll lose their homes. Here’s why that’s not the case: VA hybrid ARMs can only adjust once per year, can only increase by a maximum of 1% each year, and can never get more than 5% higher than what it started as. In other words, if you got a 3/1 hybrid ARM today with a 2.25% starting rate, the worst-case scenario is that 8 years into the loan, you’d cap out at 7.25% and stay there for the rest of the loan. Since that has never happened in the history of the CMT (the index used for hybrid ARMs), I’d say it’s a safe bet that it won’t happen to you.
The VA hybrid ARM uses the CMT index to determine its interest rate adjustments. If you’re familiar with ARM loans, you’ll know that conventional ARMs use the LIBOR index, which is fairly volatile. The CMT is extremely mild compared to the LIBOR, and adjusts much more slowly and stays generally lower. In other words, if your rate is going to increase, you’ll be able to see it coming from a mile away, and it still won’t increase more than 1% each year, even if the CMT goes up more than a full percent.
Considering that the large majority of Americans either move or refinance every 3-5 years, and it would take at least 8 years for your ARM interest rate to get to its maximum, an ARM is a very safe way to finance your home.