The current economic downturn has put many homeowners in financial hardship. With many people being financially strapped, a good question to ask is whether or not the VA hybrid loan is a good option for saving money. For some, this loan gives them just the right amount of flexibility in their mortgage and for others, it simply isn’t the right choice. Before you write off this option, take a look at some of the VA hybrid loan pros and cons.
VA Hybrid Loan Pros and Cons
A VA hybrid ARM is a combination of an adjustable rate mortgage (ARM) and a fixed-rate mortgage. The initial rate period is fixed, usually for the first 3, 5, 7, or 10 years of the loan. Generally, the shorter the chosen fixed-rate period, the lower the rate. After the introductory period is over, the adjustable rate begins. When the borrower reaches the adjustable-rate period, the rate can only adjust every 12 months, and adjustment rate caps protect the borrower from the rate jumping too high right off the bat. There are also lifetime caps of 5 percent in place so that the loan will never exceed their fixed rate plus 5 percent. For example, if you were to get a 2.75 percent interest rate with a VA 3 1 hybrid loan, the loan would never be able to reach more than 7.75 percent interest, and it also could not rise more than 1 percent each year.
Many veterans might be uncertain about this type of loan because of what may happen with interest rates in the future. While it is good to be cautious, present financial issues may be more important than future costs. This loan allows for monthly savings right now, which could allow for savings later as well. There are pros and cons to every loan option. Borrowers must look at each side and decide which is the right alternative for them and their current situation.
Pros of the VA Hybrid
However, there are definitely some advantages to the hybrid ARM! First of all, the borrower will get a guaranteed fixed rate for the first 3 to 5 years or however long they opt for. Then after that, the rate can only adjust every 12 months, and keep in mind that the rate can go down during this time as well! Perhaps one of the biggest advantages of the hybrid ARM mortgage is that the interest rate can drop frequently (within the caps limits, of course). It is entirely possible for you to have a very low rate throughout the life of your loan. And even if the rate rose every once in a while, wouldn’t that be worth taking advantage of the much lower rates whenever they come along?
Many homeowners may choose this option for a loan because it doesn’t makes sense to pay a fixed rate for thirty years when they will mostly likely move out of their homes and loans before then anyway. It’s also important to note that if the borrower is looking for a jumbo loan, an ARM is probably the best choice for them. It will offer them substantial savings over a thirty-year loan because the rates are normally quite a bit higher with ordinary jumbos while jumbo hybrid ARM rates are generally much lower.
Cons of the VA Hybrid
There are a few disadvantages that need to be kept in mind. If the interest rates skyrocket after the introductory period, the borrower could end up paying a considerably larger interest rate over the life of the loan. That being said the VA has put in place some safety nets for veterans. If rates do happen to go up, interest rates on a VA ARM loan can only go up a maximum of 1% a year with a maximum of a 5% cap. So if interest rates do go up five consecutive years the maximum that can be applied to the loan is an additional 5%. This makes the VA hybrid a relatively safe loan options for veterans. On the flip side, if the borrower chooses a long fixed rate period and the market’s interest rates drop, then they will end up stuck in their high fixed rate. It can go both ways. When financing with a VA hybrid loan, the borrower has to accept the interest rate risk after the fixed-rate period. The uncertainty that comes with the VA ARM portion of a hybrid loan is what generally keeps borrowers away from this type of loan, especially if they know they will be in their house for much longer than the initial fixed-rate period.
Are you thinking about getting a VA Hybrid Loan?
The VA Hybrid ARM Loan offers safety and savings. This is a combination that is hard to pass up. Yet borrowers still need to decide which loan option is the best for them. To know whether this loan would be best for you in your individual situation, give us a call now at 866-569-8272. We can set you up with a loan officer who can give you an accurate quote and great advice to help you decide. At Low VA Rates, we make it a priority and a policy to save every borrower money on their home.