Understanding the VA Hybrid Loan

UnderstandingVAHybrid
Click Image to Download

The VA Hybrid Loan is a great option for many military homeowners to assist veterans in saving hundreds of dollars per month. However, there are many misconceptions and negative perceptions surrounding the VA Hybrid Loan.

Many military homeowners assume any loan outside of a 30-year fixed loan is toxic and a bad option. This is not true and many homeowners are steering away from loans that may be better options for their specific circumstances.

The VA Hybrid e-book was created to give homeowners all the details about the VA Hybrid loan and try and explain the benefits to veteran homeowners. We hope you enjoy the e-book and have a greater understanding of the VA Hybrid Loan.

Click Here to View the e-book

 

VA Hybrid Loan Pros and Cons

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.

 

Hybrid Mortgages & The CMT Index

VA Hybrid mortgages (like most adjustable-rate mortgages) use the Constant Maturity Treasury index. Often abbreviated as the CMT index, this measures the one-year yield of recently auctioned U.S. Treasuries. From Investopedia: This article will help you get a more in depth understanding on how a VA hybrid loan works. VA Hybrid mortgages could save you a lot of money and are definitely something to consider. Understanding the CMT index and how it works with VA arm loans will help you make a better educated decision.

A Closer Look at Hybrid Mortgages & the CMT Index

The interpolated one-year yield of the most recently auctioned four-, 13- and 26-week U.S. Treasury bills, plus the most recently auctioned 2-, 3-, 5- and 10-year U.S. Treasury notes as well as the most recently auctioned U.S. Treasury 30-year bond, plus the off-the-runs in the 20-year maturity range.

Index and the ARM

For the purpose of ARMs, the CMT index for the past year is calculated each day (on a rolling 365-day basis). To calculate the 1-year CMT, the U.S. Treasury takes all the daily performances for the last year and averages them, which takes a lot of the volatility out of the index, making it a lot more predictable and mild for borrowers who are wondering where their loan will adjust in the coming year. While some adjustable rate mortgages have the option of using a different index, all VA ARMS are tied to the CMT index and cannot use a different one.

 

Understanding constant maturity isn’t really very important for understanding your VA loan, but for your information, here is the definition from Investopedia:

An adjustment for equivalent maturity, used by the Federal Reserve Board to compute an index based on the average yield of various Treasury securities maturing at different periods. Constant maturity yields on Treasuries are obtained by the U.S. Treasury on a daily basis through interpolation of the Treasury yield curve, which in turn is based on closing bid-yields of actively-traded Treasury securities. Constant maturity yields are used as a reference for pricing debt securities issued by entities such as corporations and institutions.

 

The CMT index is always fluctuating, but it has been extremely low for several years now, and as of the week of the writing of this article, is sitting at .12%. Considering that the index is added to the margin of the lender, and that Low VA Rates is offering either a 2% margin or 2.25% margin (depending on what your starting rate is), that means your rate after your fixed period could be as low as 2.12%. That’s a pretty fantastic rate, considering the best you could reasonably expect on a VA fixed-rate mortgage is 3.75%, and probably higher.

 

The margin that the lender charges is essentially how they make a profit. The full term is “profit margin”, The CMT index measures risk-free securities (hint: not mortgages), therefore, as lenders use the CMT index to calculate interest rates on securities that are not risk free (e.g. homes), they need to pad the index with a profit margin to protect themselves from the risk. If you’re interested in learning more about the CMT index, other indexes, or investing in general, feel free to check out the links above to investopedia, or give us a call here at Low VA Rates, and we’ll be happy to address any questions you have related to the VA loan program.

 

Understanding VA Hybrid ARMs – Terminology

Understanding VA Hybrid ARMs – Terminology

 

VA ARMs TerminologyThe hybrid ARM offering in the VA loan program is one of the best-kept secrets of the program. Utilizing the VA hybrid ARM can save you as a borrower tens of thousands of dollars. The purpose of this article is to go over the terms you need to understand in order to make a good choice about your VA hybrid ARM, and to explain the basics of how a VA hybrid ARM works. For more details on these terms and about the VA hybrid ARM, check out our video on YouTube. The first thing we need to define is what hybrid ARM. ARM stands for adjustable-rate mortgage, and is the opposite of a fixed-rate mortgage. A traditional ARM (not a hybrid) has an adjustable interest rate that usually adjusts annually to match or come closer to market rates at that time. A fixed-rate mortgage is more common; the borrower is locked into a certain interest rate during the application process and has the same interest rate for the entire duration of the loan, independent of market fluctuations. A hybrid ARM is somewhere in the middle of a traditional ARM and a fixed-rate mortgage.

 

In a VA hybrid ARM, the interest rate is fixed for a certain number of years at the beginning of the loan, then adjusts annually throughout the rest of the loan. You have the ability to choose how many years the interest rate will be fixed, and there will be several options of which note rates to choose from. You’ll also want to check out the differences between the margins you are being offered by different lenders, make sure they are charging the same index, and make sure they are following VA guidelines in terms of adjustment caps, frequency, and ceilings. If nothing in the last sentence made sense to you, you are in the right place. We are going to cover the terms you just heard so you can understand them when your lender uses them.

 

The term “note rate” refers to what the initial interest rate for the fixed period will be. On a 3-1 hybrid ARM, the interest rate will remain fixed for the first three years of the loan, then be adjusted annually afterwards, no more than 1 percentage point in either direction. Usually lenders will offer two or three different options for a starting note rate, and while it may be tempting to choose the lower one, there are other factors you need to consider when doing so – sometimes it may actually save you money in the long run to choose a higher note rate in exchange for a better margin come later. We’ll cover what a margin is in a moment, but first, the note rate for VA hybrid ARMs is usually either 2.25% or 1.75%. You read that correctly, the higher of the two (2.25%) is a full two percentage points lower than what the conventional mortgage arena is offering for fixed-rate mortgages. This is the first reason why hybrid ARMs are so advantageous.

 

The terms “margin” and “index” are closely related. Margin and index are added together to determine your interest rate after the initial fixed period. To clarify, on a 3-1 hybrid ARM, after three years, the note rate disappears and never returns, and is replaced with a new rate calculated by adding together the margin and index. Now, what is the margin? The margin is determined by the lender, and is essentially what they’re willing to offer you on the loan. The margin should not change throughout the loan; it should remain constant. The margin the lender offers you will depend greatly on which note rate you choose. If you choose the 1.75% note rate, you will likely be offered a higher margin than if you had chosen the 2.25% note rate. It’s a numbers game, but crunch them to find out if the lower rate for the first three years is worth the higher margin for the rest of the loan term. Right now, LowVARates is offering a 2% margin if a qualified borrower chooses a 2.25% note rate.

 

The index is how the lender keeps the interest rate current with the market as it fluctuates. The VA loan program uses the CMT index, which is not really that important to know except that it tells you that you shouldn’t worry too much about volatility. The CMT index is calculated annually and averages all 12 months in the year, which makes it representative of trends rather than isolated events. Currently, the CMT index is at .1%. So if three years ago, you chose a 2.25% note rate on a 3-1 VA Hybrid ARM, your interest rate would actually drop to 2.1% (margin+index) this year.

 

You’ll also hear the terms “caps”, “ceilings”, and “floor” in relation to your interest rate. What you need to know is that in the VA loan program, your interest rate is not allowed to adjust more than 1% in each direction each year, and cannot increase by more than 5% over the life of the loan.

 

Common Myths about VA Hybrid ARMs Debunked Part 2

Common Myths about VA Hybrid ARMs Debunked Part 2

 

This is the second of two articles about common myths about VA hybrid ARMs. For more information on these myths and an interesting presentation, check out our video on YouTube. The first two myths were covered in the first article; these are the last two, starting with number three.

3. If I want to pay my house off faster, then I should use a fixed rate on a shorter term.

 

 

Again, this is not true. The reason is simple. Your ability to pay off your home faster than the minimum is based on basically two things: the minimum payment, and your income. Since your income is probably independent of the choice between a fixed-rate or a hybrid ARM, the only thing that changes is the minimum payment. Your minimum monthly payment is primarily principal+interest. If you are at a lower interest rate, your minimum payment will be lower as well.

 

In the above example, where the fixed-rate is at 4.5% and the VA hybrid ARM is at 2.25% for the first three years, the hybrid ARM will have a significantly lower minimum payment than the fixed. What does that allow you to do? Pay more than the minimum payment! Just by paying the amount you would have paid (or have been paying) on the 4.5% fixed-rate, you can pay off more principal faster on a hybrid ARM. Plus, since it is extremely unlikely that interest rates will go up consistently for seven years in a row, you could be 10 years into the loan before your hybrid ARM rate gets as high as the fixed-rate was at the beginning! By then, if you’ve paying what you would have paid on a 4.5% fixed-rate, you may only have 5 or 10 years worth of payments left, and far less principal to be charged interest on than you would have otherwise.

4. A 30-year fixed rate is safer and better for someone to forecast or plan for the future.

 

 

This is a myth that is present mostly here in the United States. It is no coincidence that the U.S. was also hit the hardest by the housing crisis. This myth is devastating because of the simple fact that nobody is ever really paying off the same loan over 30 years – by far (like 99%), most people who purchase homes get a new loan every 4-6 years. This is why the VA offers both 3-year and 5-year hybrid ARMs, whose rates remain fixed at a much lower rate during the initial period – until about the time most borrowers are going to be refinancing or selling anyway. But even for those very few who keep the same loan beyond 6 years, the VA has built in protections to make sure that those borrowers aren’t hit too hard by changing interest rates.

 

First, as mentioned above, the VA uses the CMT index, which is a fairly gentle and non-volatile index, to calculate its rates. The CMT index prevents volatility by averaging activity over 12 months to calculate a yearly average. This yearly average is what is used as the index on VA hybrid ARM loans. Second, the VA places an annual cap that prevents interest rates from rising by more than one percentage point each year. Also mentioned above, this limitation means that even if interest rates are skyrocketing, it could still take years to get as high or exceed the interest rate you’d be dealing with on a fixed-rate mortgage. Third, the VA loan program puts a ceiling on how high the interest rate can ever go. If your hybrid ARM started at 2.1% after the initial fixed period, it could never go higher than 7.1% no matter what interest rates are doing. This is an extremely valuable protection not only for the money it saves in case interest rates do skyrocket and stay there for an extended period of time, but also so you can forecast and plan for the worst-case scenario. You can know with 100% surety what you are risking with a hybrid ARM.

 

Conclusion

Hybrid ARM VA Loan: Lower Interest Rates Save you Money
As a bonus for those who are still not convinced, think of what you can do with all the saved money from a lower interest rate. Imagine taking the money that you would have been spending on a higher monthly payment with a fixed-rate mortgage and paying off your credit card debt. Credit cards can have interest rates in the 20% area – especially for delinquent amounts. Taking money saved with a lower mortgage payment and using it to pay off credit cards can save you a ton of money in both the short-run and the long-run.

Hybrid ARM Loan Common Myths

Hybrid ARM loans have plenty of myths and misconceptions about the hybrid loan  that have been perpetuated both by well-meaning but misled individuals and by intentionally deceiving parties that stand to profit by having fewer borrowers choose any kind of adjustable-rate mortgage. This article will address two of the four most common myths about ARM loans in general, but primarily about the VA hybrid ARM program.

 

1. My Hybrid ARM Loan Payment Will Go Up When My Rate Starts to Go Up.

While this certainly can happen, and even happens with some frequency, your monthly payment can actually stay lower than it would have been on a fixed-rate mortgage even if the rate goes up. Considering that as of the writing of this article, a common interest rate on a fixed-rate mortgage is 4.5%, and the most common starting rate on a VA hybrid ARM is 2.25% for the first three years, the hybrid ARM rate would have to literally double before it got as high as the fixed-rate mortgage.

VA Hybrid ARM Common Myths

The VA hybrid ARM program limits the amount a rate can adjust to one percentage point each year. In other words, after three years of 2.25% (which already saves you a bundle of money), the highest it could jump to is 3.25%, still a solid 1.25% lower than what you’d be paying on a fixed-rate. Even if it jumps a full percentage point at the end of the three  years, and another full percentage point the year after that (pretty unlikely scenario, by the way), you would still be going into your fifth year on the mortgage with a rate of 4.25%, still a quarter of a point lower than where you would be on the fixed-rate mortgage. Remember that more interest is paid at the beginning of the loan that at any other point, and your monthly payment will most likely stay lower than your fixed-rate payment.

2. My Hybrid ARM Rate Will Definitely Go Up.

This is not true. While rates can go up, rates also go down as well. This is shown throughout history to be the case. The VA loan program calculates its interest rates based on the CMT index, which is calculated on an annual basis. From 2001-2011, the CMT index went down for seven out of the ten years, and continued to go down in subsequent years. As of the writing of this article, the CMT index is currently at .1%, which is incredibly low. In all of U.S. history, only once has the index increased a full percentage point for more than two years in a row. So it is certainly possible that your interest rate will go up, but it is also very possible that it will go down.

The VA has put numerous protections in place on the hybrid ARM program to keep it a good deal for eligible VA borrowers. Even if your rate does go up, it cannot go up more than 1% each year, and it is extremely unlikely (as in it has happened once in the history of the United States) that the rate will go up a full percentage point for two years or more. The VA also places a limit on hybrid ARM rates, so that they can never be more than five percentage points higher than what they started at.

3. I Should Use a Fixed Rate With Shorter Term If I Want to Pay Off My Home Faster.

Again, this is not true. The reason is simple. Your ability to pay off your home faster than the minimum is based on basically two things: the minimum payment, and your income. Since your income is probably independent of the choice between a fixed-rate or a hybrid ARM, the only thing that changes is the minimum payment. Your minimum monthly payment is primarily principal+interest. If you are at a lower interest rate, your minimum payment will be lower as well.

In the above example, where the fixed-rate is at 4.5% and the hybrid ARM is at 2.25% for the first three years, the hybrid ARM will have a significantly lower minimum payment than the fixed. What does that allow you to do? Pay more than the minimum payment! Just by paying the amount you would have paid (or have been paying) on the 4.5% fixed-rate, you can pay off more principal faster on a hybrid ARM. Plus, since it is extremely unlikely that interest rates will go up consistently for seven years in a row, you could be 10 years into the loan before your hybrid ARM rate gets as high as the fixed-rate was at the beginning! By then, if you’ve paying what you would have paid on a 4.5% fixed-rate, you may only have 5 or 10 years worth of payments left, and far less principal to be charged interest on than you would have otherwise.

4. The 30-Year Fixed Rate is a Better & Safer Loan

This is a myth that is present mostly here in the United States. It is no coincidence that the U.S. was also hit the hardest by the housing crisis. This myth is devastating because of the simple fact that nobody is ever really paying off the same loan over 30 years – by far (like 99%), most people who purchase homes get a new loan every 4-6 years. This is why the VA offers both 3-year and 5-year hybrid ARMs, whose rates remain fixed at a much lower rate during the initial period – until about the time most borrowers are going to be refinancing or selling anyway. But even for those very few who keep the same loan beyond 6 years, the VA has built in protections to make sure that those borrowers aren’t hit too hard by changing interest rates.

First, as mentioned above, the VA uses the CMT index, which is a fairly gentle and non-volatile index, to calculate its rates. The CMT index prevents volatility by averaging activity over 12 months to calculate a yearly average. This yearly average is what is used as the index on VA hybrid ARM loans. Second, the VA places an annual cap that prevents interest rates from rising by more than one percentage point each year. Also mentioned above, this limitation means that even if interest rates are skyrocketing, it could still take years to get as high or exceed the interest rate you’d be dealing with on a fixed-rate mortgage. Third, the VA loan program puts a ceiling on how high the interest rate can ever go. If your hybrid ARM started at 2.1% after the initial fixed period, it could never go higher than 7.1% no matter what interest rates are doing. This is an extremely valuable protection not only for the money it saves in case interest rates do skyrocket and stay there for an extended period of time, but also so you can forecast and plan for the worst-case scenario. You can know with 100% surety what you are risking with a hybrid ARM.

 

VA Hybrid Loan Tips To Think About

Hybrid ARM VA Loan: Lower Interest Rates Save you Money

As a tip on how valuable a lower interest rate is, remember that interest is nothing but poison. Paying interest is exactly like throwing money out the window or lighting it on fire rather than using it. Any interest you pay is lost money that you worked hard for and earned and got nothing from it. There are two types of people in this world – people who pay interest and people who collect it – and guess which group is wealthier. Obviously, creditors have a right to charge interest, since that’s how they get paid for their services. Creditors allow you to have something now, instead of having to save for it and get it later. For that privilege, they charge interest, and that’s how they make money, and there’s nothing unethical or wrong about that. For you the borrower, however, you need to remember that every dime you pay in interest is a dime more than you had to pay. Do everything in your power to only pay interest when there is no avoiding it, and to choose the option that brings less interest, and you’ll be shocked at how much

Still not convinced? Here is another good article about the VA Hybrid Loan Pros and Cons that may help you decide the best option for your situation.  Think of what you can do with all the saved money from a lower interest rate. Imagine taking the money that you would have been spending on a higher monthly payment with a fixed-rate mortgage and paying off your credit card debt. Credit cards can have interest rates in the 20% area – especially for delinquent amounts. Taking money saved with a lower mortgage payment and using it to pay off credit cards can save you a ton of money in both the short-run and the long-run.money you save.

 

 

 

Choosing the Right VA Hybrid ARM For You

Choosing the Right VA Hybrid ARM For You

 

This article assumes you already have foundational knowledge about the VA hybrid ARM. If you want to brush up on some of the terminology, check out our helpful video on YouTube, or if you want a fairly full understanding of the VA hybrid ARM program, check out our helpful guide here on LowVARates. Not all VA hybrid ARMs are created equal, and some ARMs will seem very tempting, but actually bring less total benefit some other seemingly less-appealing options. In this article we’ll go over many of the things you’ll need to consider when trying to decide which option to choose.

 

Choosing a VA Hybrid ARM

The first thing to consider is the relationship between the note rate you choose and the margin that the lender offers with it. Usually, the lender will offer a lower note rate in exchange for a higher margin at the end of the initial fixed period. In order to make the best decision, you will need to do some not-so-simple number crunching to determine which will save you more money. Is the low-margin, higher-note-rate combo more cost effective over the term of the loan, or is the high-margin, lower-note-rate combo going to keep more cash in your wallet? You’ll need to figure how much interest you’ll pay during the initial period with each of the note rates (usually 2.25% and 1.75%), then how much interest you’ll pay throughout the rest of the loan with each margin. For this calculation, you can ignore the index, as it will do it’s thing regardless of which note rate you choose. Like I said, this is a bit complicated, but let’s walk through an example together. You can make these calculations using one of many free mortgage calculators online.

 

Let’s say you are looking at a 3-1 hybrid ARM for a loan amount of $100,000. First, we need to calculate and compare how much interest you’ll pay with each note rate (so we are only considering the initial fixed three year period). For a 2.25% rate, you’ll pay $6,688.90 in interest in the first three years. For a 1.75% interest rate on the same loan, you will pay $5,186.96 in the first three years. So, a 1.75% saves you money in the first three years – anybody could tell you that. But on the 2.25% rate you were offered a 2% margin, and on the 1.75% rate you were offered a 2.25% margin. Remember that the margin (plus the index, which we are not worrying about) is what makes up your interest rate after the initial fixed period is over. So in this example, you’ll be paying the margin for the remaining 27 years of the loan. After the first 3 years of normal-amortizing payments, there will be $92,545 of principal remaining. With the 2% margin that you got with the higher note rate, over the remaining 27 years you will pay an additional $27,300.39 in interest. With the 2.25% margin that you got with the lower note rate, you will pay an additional $31,023.50 in interest.

 

So, if you chose the lower note rate (1.75%) with the higher margin, you will pay a total of $36,210.46 of interest on that $100,000 loan. If you chose the higher note rate (2.25%) with the higher margin, you will pay a total of $33,989.29 of interest. The higher note rate will have saved you roughly $2,700 over 30 years, making it the better choice in the long run. It’s important to note, that if this were on a 5-1 hybrid ARM, where the note rate is applied for the first 5 years instead of just the first 3, these numbers would be different, and it may even be that the lower note rate would be more advantageous even though it was paired with a higher margin. This is the second thing to consider – the relationship between the initial fixed period and the note rates and margins offered at each duration. The offered note rate and margin will usually change depending on the initial fixed rate, and those changes will affect the cost effectiveness of each option.

 

The last thing we’ll discuss here is the importance of remembering how interest is calculated. Interest is calculated by applying the rate to the remaining principal. What this means is that you are paying a larger dollar amount of interest at the beginning of the loan than you are at the end. This is because the same interest rate (let’s say 2.25%) is being applied to the remaining principal. At the beginning of the loan, you still have close to $100,000 of unpaid principal remaining, and the amount of interest is 2.25% of whatever the principal is. As you pay off more principal, the amount of interest you are charged gets smaller because 2.25% of any amount smaller than $100,000 is less than 2.25% of $100,000.

 

The Advantages of a VA Hybrid ARM

What Advantages Does a VA Hybrid ARM Offer?

This article is mostly taken from our VA Hybrid ARM Guide from our website. For more information on Va Hybrid ARMs, please check out the full guide.

VA Hybrid ARM Advantages

The first and most obvious advantage is getting a lower starting interest rate than on a fixed-rate mortgage. A Hybrid ARM finds a fantastic middle-ground between fixed-rate and adjustable-rate mortgages. Fixed-rate mortgages can be frustrating if interest rates fall after you’ve gotten your loan, and adjustable-rate mortgages can be risky if interest rates rise significantly over the life of the loan. In a Hybrid ARM, you and the lender both get the potential benefit of having your interest rate adjust with time, but you also have two assurances to mitigate your risk: your rate is only adjustable after the first 3 years or the first 5 years, and it can adjust by no more than 1% per year. This offers an amazing amount of benefits to you as the borrower. Consider the following example:

 

You purchase a home using a 5-year Hybrid ARM, which means that your interest rate will be fixed for the first 5 years of the mortgage, after which it will adjust annually no more than 1% in either direction and a lifetime cap of 5%. No matter whether interest rates got lower or higher during the first 5 years, you’re in a great position. If interest rates got lower, your interest rate will automatically begin adjusting accordingly, without you having to go through the time, trouble, and a fair amount of money to get a refinance. If interest rates got higher, your loan may still take years to catch up to the current rate, and if the rise was dramatic enough (more than an additional 5%), your loan may always stay lower than what you could get if you refinanced. In other words, no matter what your plans for the home you are buying are, getting a VA Hybrid ARM instead of a fixed-rate or a regular ARM can save you money.

 

Being quite honest, despite some myths, VA Hybrid ARMs are advantageous in almost every situation, but there are some situations that get even more benefit out of the Hybrid ARM than others. For example, if you are not intending to live in your home longer than 5 years, you get an enormous amount of value in a Hybrid ARM because you get a lower interest rate than you could in a fixed-rate mortgage, and you never have to worry about it adjusting because you’ll be selling before it does. Hybrid ARMs also offer a more significant benefit if you expect to be able to make more than the minimum payment for the first few years of the loan term, but not necessarily after (e.g. your children will be college-age in about 5 years and at that time you will likely need to divert more money to helping them through college). Since the rate stays fixed and relatively low for the first 5 years, you can knock the principal down each month ahead of the amortization schedule, so even if the rate gets higher after the initial term, your monthly payment doesn’t get as much higher, if it increases at all.

 

Lastly, if you are expecting to live in your home until it is completely paid off, a VA Hybrid ARM can save you tens of thousands of dollars over the life of the loan. How? Consider the following example:
You buy a house intending to grow old in it. By choosing a Hybrid ARM, you get the benefits of a refinance (a lower interest rate if rates have gone down) without the cost (thousands of dollars in closing costs). Unless you’re looking to get cash-out to consolidate debt, there is no need to refinance a Hybrid ARM, because it adjusts annually towards the current interest rate. In addition to the thousands of dollars saved due to not needing to refinance, you are also enjoying a lower interest rate than you could have gotten with a fixed-rate mortgage (especially during the initial 3 or 5-year term, where you pay more interest per month than any other time during the loan), which can save you thousands of dollars more over the life of the loan. How much money can you save? Let’s say you buy a $200,000 home at an interest rate of 4.0%. How much money do you save compared to a $200,000 home at 4.5%? Roughly $20,000 of interest  over 30 years. Imagine how much money a difference of an entire percent or more could save you.

Understanding the VA Hybrid Adjustable Loan

A hybrid adjustable mortgage, or hybrid ARM, is a mortgage loan with an interest rate that is fixed, which means the loan amount stays consistent, after an initial period and then acts adjusts annually after the initial fixed period, like an adjustable rate mortgage, or an ARM. An adjustable rate mortgage is a loan where the interest rate adjusts based on indexes or prime rates. Lender often set a cap for how high the interest rate can reach annually.

Hybrid ARM loans hybrids together both a fixed rate and an adjustable rate mortgage. Also unlike an ARM, VA Hybrid ARM adjust only once a year and are tied to a financial index that averages rate changes over a twelve month period so as not to subject the borrower to wild payment swings, except for the first adjustment which may occur no sooner than 36 months from the date of the borrower’s first mortgage payment on 3/1 ARM or 60 months from the date of the borrower’s first payment on the 5/1 ARM. The cap on the interest rate is 5% for VA hybrid ARM.

There are several different terms for a hybrid ARM. Hybrid ARM term is referred to first by the fixed amount rate and then the adjustable amount rate periods. For example, hybrid ARM 3/1 is a fixed mortgage rate for 3 years and an adjustable rate for 1 year. The date the fixed rate switched to the adjustable rate is known as a reset date. A Hybrid ARM transfers some interest rate risk from the lender to the borrower allowing for lower interest rates. The usual Hybrid ARM rates are 3/1, three years fixed rate and 5/1, with a five-year fixed rate. These rates are usually 30-year programs.

There are many advantages to a VA hybrid loans. Here are the top three reasons:

Hybrids are the best of both worlds, getting a fixed rate at first but then later having more flexibility with the adjustable rate. If you cannot decided between which kind of loan to get, get both! Hybrids are great if you feel that rates will be lower in next couple of years, since you have a fixed rate at first when rates that is usually 1-2% lower than a fixed rate and then the loan amount will adjust to a possible lower rate. Since there is a cap in place from the lender, the rates during the adjustable period cannot be higher than 1%. Also, if you know that you will be making more money in the next couple of years, like if a borrower is in school, a hybrid in another great option.

Hybrids are particularly great if a borrower will not be staying in their home long. Since you can get the lower interest rate for hybrids, a borrower can buy a home at a lower interest rate with a hybrid and then sell it before the rate becomes adjustable. The VA hybrid loan typically an initial start rate of 1-% lower than the going 30 years fixed rate. This can amount to an extra $100 to $200 a month in savings and if you will not be in your home long, you will never have to worry about rates fluctuating.

Interest rates are also lower for an ARM, so it is easier to borrower more. This can help first-time homebuyers afford a larger home.

There are many great benefits that come from having a hybrid VA loan and this option should be looked at by anyone wanting to purchase or refinance their home.

But is the 3 and 5-year Hybrids the only option? NO.

Let me introduce the 7 years VA Hybrid Loan.

When shopping for a mortgage, it’s very important to pick a suitable loan product for your unique situation. Whether that is the 3, 5 or 7 Year Hybrids or the 30 years fixed.

Let’s compare two popular loan programs, the “30-year fixed mortgage vs. the 7-year ARM.”

We all know about the traditional 30-year fixed – it’s a 30-year loan that never adjusts. Pretty simple, right?

But what about the 7-year ARM? During the first seven years, the mortgage rate is fixed, and for the remaining 23 years the rate is adjustable.

This makes the 7-year ARM a so-called “hybrid” adjustable-rate mortgage, which is actually good news.

 

You probably don’t want your mortgage rate (and mortgage payment) to change all the time, especially if it’s only going to move higher.

With the 7-year ARM, you get mortgage rate stability for seven years before even having to worry about the first adjustment (much longer than the other hybrids). And because most homeowners either sell or refinance before that time, it could prove to be a good choice for those looking for a discount.

That’s right, the 7-year ARM is cheaper than the 30-year fixed, or at least it should be. By cheaper, I mean it comes with a lower interest rate than the 30-year fixed which equates to a lower monthly mortgage payment.

Let’s just assume that mortgage rates on the 7-year ARM average 2.75 percent. Meanwhile, the average rate on a 30-year fixed was 4 percent.

 

That’s a difference in rate of a percentage point, and a difference in payment of $136.21  a month, $1634 a year, and over $11,000 over the first seven years on a $200,000 loan amount.  A much greater savings compared to either the 3 or 5-year hybrid options.

Loan amount: $200,000
30-year fixed monthly payment: $951.04

7-year ARM monthly payment: $814.83

 

So not only do you save long-term, but you also save monthly, meaning you can put that extra money to good use somewhere else, such as in a more liquid investment, or simply to pay other bills.

But is it worth it?

If you actually plan on staying in your home and paying off your mortgage, you face the possibility of an interest rate reset (higher, or lower).

And you don’t want to get caught out if rates surge over the next seven years, especially if you can’t sell or don’t want to.

However, if you’re like many Americans, who sells or refinances within seven years, the program could make a lot of sense.

Just be sure to do the math on both scenarios before committing to either of these loan programs.

As always, you should be able to afford the fully-indexed rate on the ARM, should it adjust higher. So if a rate adjustment isn’t within your budget, or won’t be in the future when it adjusts, you may want to pay it safe with a fixed-rate mortgage.

Put simply, the 7-year ARM offers the greatest amount of savings over 7 years, whereas a 30-year fixed is pretty straightforward and stress-free.  And that’s why you pay more for it.

Safer – VA Hybrid Loan or 30 Year Fixed

If you have not yet realized, we at Low VA Rates are experts in the VA hybrid loan.  We pioneered this loan type for the military years before the rest of the industry started to catch on.  Back in 2008, we issued this press release notifying every one of the benefits of the VA hybrid arm loan.

We are now leading the way in educating Veterans and Military not just on the simple basics about the VA hybrid arm mortgage, but more so on the integral moving parts of the VA hybrid loan.  There are so many misconceptions that are keeping our men and women of the military both active and Veterans from using this amazing loan tool to accomplish so many great things.

This video will attack one of the most popular fears or misconceptions about the VA hybrid loan and that is that most people think that a 30 year fixed rate mortgage is a safer loan than a VA hybrid mortgage.  We want to show you why this is normally not true and why we are such big fans of the VA Hybrid loan. As you will see in the video above, we are doing all we can to educate people on how the VA hybrid loan is actually much safer than the 30 years fixed rate loan. We like this loan because it’s better for you! We want to make sure that you understand how the Hybrid loan works so that you can better choose what’s right for you in your situation.

Some of the common beliefs are:

 

  • 30 yr fixed rates are better for paying off your mortgage in the long run
  • 30 yr fixed rates are better for those wanting to live in the home forever
  • 30 yr fixed rates make budgeting for retirement easier.

 

The above thoughts, although very common are also very untrue.  This video will explain why:

  • VA hybrid loans are better for paying off your house fast
  • VA hybrid loans are safer for retirement and budgeting
  • VA hybrid loans are better for people who want to live in their home forever.

 

We hope you find this video helpful! Once you’ve decided that The VA Hybrid is right for you, give us a call! We’d love to help you through the process. call us at 866-569-8272, We can’t wait to hear from you soon!

How Not to Sell a VA Loan

I do not view myself as a salesman. I think the secret to “selling” a loan or anything else for that matter is simpler more honest than many may think. If I do nothing more than push an interest rate, then “I” am not selling anything; only the rate is. Too often many of us are conditioned to chase low-interest rates simply because the perceived wisdom tells us to. In fact, there is no “one size fits all” loan program, rate or fee structure. Realizing this, helps us better serve our VA loan clients, helps our veteran clients make more sound decisions, and establishes a relationship of trust between the veteran and their loan officer.

I can see how reading this title at first might lead one to think this post was meant for people who work with or for me. I share this here to give my veterans an insight into my personal philosophy and how when it comes to giving a veteran the best deal and best service I can, our interests are more closely aligned than one might think.

7 steps to take on every VA loan.

1. Get the data and identify the veteran. This information gives a context to a veteran’s motivation for investigating a loan. Sometimes a veteran is unaware of the best option or, in some cases, convinced an alternate option is better than what you suggest. This helps frame basis of your advice. Questions might include: How much debt do you have, how much do you owe on the home, what is your payment.

2. Find out the veterans goals – This can be open-ended: What are your intentions with a potential VA refinance? Or pointed requiring a yes or no answer:

· “Are you looking to free up money to pay down other debts?”

· “Are you looking to free up money to supplement your income?”

· “Are you looking to pay the home off faster?

3. Check the time – “What is the minimum amount of time that you are sure you will own the home?” This question provides scope to the mortgage options you present.

4. Run the numbers & create a plan – At its most essential, a refinance is an investment. You agree to pay/add a certain amount of closing costs in exchange for incremental savings over time. When the cumulative amount you have saved has equaled the costs of the refinance, you have achieved the “breakeven point” in the loan. From this point forward any savings experienced are now “true” savings. The optimum quote will be one where the loan program, rate and fee combination saves the veteran the maximum amount of money between the “breakeven point” and the end of the length of time they were sure they would own for.

5. Identify the risk – By determining the potential risk, advantages and drawbacks of the various options available you alleviate unknowns. Unknowns create uncertainty, and uncertainty prevents good decision making. A fixed rate loan is often thought to be the safest loan available, but not necessarily for someone who has a large amount of higher interest rate credit debt. By taking a VA Hybrid ARM, the veteran might save significantly more. Since credit cards calculate the interest rates on the ending monthly balance, the faster one pays off credit card debt, the more money they free up each month. I have often been able to show veterans how paying off credit card debt faster can free up enough money to offset the maximum “worst case” rate/payment they could ever reach on the loan.

6. Clarify details and explain the options – encourage the veteran to ask questions. It is often the case that veterans object to the Hybrid ARM simply because it is an ARM. To disregard all ARM loans simply because of the ARMs with unfavorable terms that have hurt many homeowners is like refusing to ever drive a car simply because Toyotas are currently being recalled.

7. “You sell ME.” – If a loan officer has completed the preceding steps perfectly, then a sale is no longer the issue. Once you have devised a plan that best meets their goals, mitigates their fears and ultimately saves them the most money, you are talking about common sense. Though I don’t directly ask this of my veterans, my philosophy is “you sell ME as to why you shouldn’t do this.” In my experience, following these steps through with this approach helps the veteran arrive at a clear and meaningful decision.

Veterans have many loan options and there are many lenders and brokers who they could work with and may even be able to offer the same deal you can. Following these simple rules help me to distinguish myself among the choices, and hopefully earn their business.

Debt Management and the VA Hybrid ARM

VA Hybrid ARM

 

In a previous blog post, I discussed the benefits offered by the VA Hybrid Loan programs. By now, more veterans than ever before are finding that the VA Hybrid Loans are not only more secure than they had previously assumed, but they offer a more efficient vehicle to achieve their financial goals. This post will expound one of the most beneficial and widely cited benefits of the VA Hybrid loan – debt management and reduction.

 

There are three guiding principles associated with debt management:

· Evaluating and organizing debts by interest rates, terms and payments.

· Consolidating higher interest rate debt into lower interest rate debt

· Prudent Building and redirecting cash flow to pay off debts.

Let’s begin by recapping the feature benefits of the VA Hybrid loan program.

· ARM’s have a smaller fixed rate term (ex. 3-5yrs) but enjoy lower rates during that time in comparison to a fixed rate loan option. On average, rates on Hybrid VA loans are greater than 1% lower when compared to VA fixed rate loans.

· Hybrid ARM loans feature favorable terms unique among adjustable rate mortgages that include 1% yearly and 5% lifetime rate caps. Unlike most ARM loans which adjust monthly after the initial fixed rate period has elapsed, Hybrid ARM loans adjust once per YEAR and are tied to a financial index (1yr Monthly CMT) that averages rate changes over a 12 month period so as not to subject the borrower to wild payment swings.

Depending on specific debt picture, these favorable terms help VA Hybrid ARMS free up more money faster than traditional ARMs. Why? While it’s true VA Fixed Mortgage Rates don’t change, neither does the payment. In a debt reduction analysis, payments that do not adjust downward as one pays the balance are generally of a lower payoff priority than ones that do. For example, credit card interest is usually much higher than that of a mortgage, to say nothing of the fact that mortgage interest is more easily tax deductible than credit card interest. But even in cases where the borrower is enjoying a low introductory rate on a credit card, one that may even be lower than the mortgage, the more money the borrower commits to the credit card, the smaller the payment obligation will be the following month. The smaller the payment obligation the more quickly the additional savings can be applied to remaining debts. In this way, we can see that saving money in the short term often trumps long term loan benefits and provides an easier path to a debt free life.

Many VA homeowners who have followed these principles find themselves free of non-mortgage debt but later faced with an entirely distinct (albeit less serious) condition: Where is the best place to park the monthly savings now that other debts are clear? This problem is especially profound when dealing with active duty military personnel or reservists who are transferred or move to a new station. For those veterans unsure about how long they will live in a home, the hybrid arm allows the flexibility to build cash reserves. Until they move, they are free to put the payment savings into interest bearing accounts which maximize the dollars saved by the loan. Best of all if they ever “need” the money they can access it from their account at any time, without having to sell the home or to do a cash-out refinance – both instances where the veteran borrower would have to incur a closing cost or transactional fee in order to access money that could have stayed in their possession. The traditional alternative has always been putting additional savings toward the principal balance, which, while psychologically comforting does not offset the risks of devaluation or the security of being able to retain more money each month. Imagine if after 10 years you had paid your $200,000 mortgages down to a balance $100,000. If the value had not changed in that time, you could say that you have $100,000 in EQUITY. But in all that time the payment would still be the same dollar amount as it was when the loan was originally closed. But there are other disadvantages. Consider if the value of the home dropped from $200,000 to $90,000. You would be unable to access all the money you sacrificed to bring down your balance. You may have had the intention to build your equity in this way to make sure you had more money when you eventually sold the home. In this example, it would be gone since equity isn’t real money to begin with. I’ve worked with many veterans who have championed this strategy, particularly in a real estate market as nebulous as this one. Some were able to stave off an unexpected period of unemployment, others were able to sell their homes and come to the table with a portion of their saved reserves to complete the transaction and avoid a credit-damaging short sale.

Whatever the case may be, there are an abundance of options afforded to the savvy veteran homeowner by the VA Hybrid Loan program. This program is less about simply having a lower rate, it’s about having a greater degree of flexibility with your own money. Do the math. Banks are crafty enough to know that over the course of a 30-year loan you will have paid back the principle balance borrowed twice in interest. They structure loans so that you pay the maximum interest in the early years. They do this because they know that most people sell their homes or refinance the mortgages well before 30 years. It’s not my intent to cast a dark cloud over lenders. I’m not a rich man. Most people aren’t. The opportunity to finance a house is a good thing. Most of us are willing to accept a certain amount of economic disproportion in order to live in a house with our families. All any of us can do in response is to look past the myth that 30yr fixed mortgages are the only vehicle toward financial promise. We may find that the Hybrid isn’t for us, but at least we will know if we are making the most of the options at our disposal. I can promise you all that the banks most certainly will.

How about the VA Hybrid ARM?

Most veterans I speak with are wary when it comes to the subject of adjustable rate mortgages, or ARMS.  The perception is that at best they are uncertain, and at worst, they are disastrous.  Many veterans I work with are on fixed incomes and can’t afford any more uncertainty in their lives, particularly when they are already battling to keep their credit cards at bay.  Other veterans tell me that their goal is to simply pay off their home as quickly as possible, and that an ARM could potentially undermine this effort.   Its hard to argue with this logic.  For many, ARMs equal uncertainty.  And having worked with many homeowners over the years, I would venture to say that veterans crave security more than most; a fact made even more apparent to me during a VA mortgage seminar my office held for some area veterans.

Click here to get started with you VA Loan today

I began the meeting with a simple question: What do you know about adjustable rate mortgages?  To my surprise, the veterans responded immediately.

“They lure you in with low rates, and as soon as you sign the paperwork your loan starts to adjust out of control.” one veteran warned.

“I heard that your rate is fixed for a short time, but after that the bank can raise your rate whenever they want to.” another interjected.

“Adjustable Rate Mortgages are the reason that we are in this banking crisis to begin with.” noted another.

“If you miss a payment the bank has the right to take your first born child.” cautioned a fourth.

Okay, the last one was made up, but you get the idea.  I suppose what I found most intriguing about the question was that there was no shortage of responses and they were almost universally negative.  Being that I was there to discuss the new VA Hybrid ARM product, I felt the best, most relatable approach would be to describe a recent experience with a fellow veteran who had opted for this product.

I recently took an application for a veteran named Colonel Mustard.  I’ve changed his last name of course, but I can assure you all that this man was, in fact, a “full bird” colonel.  I mention this because right from the get-go he let me know how the call was going to play out:  He told me that he would only provide enough information to send him a loan quote for a VA 30 year fixed rate mortgage.  Once I did he would compare my offer against several others, and if I was the best, he would call me.   I took his application, prepared a Good Faith Estimate and sent it to him.  As always, I explained to him that rates were date sensitive and were subject to change due to market conditions.

Although Colonel Mustard acknowledged this, he must have forgotten it immediately because two weeks later I received a phone call from him followed by a signed copy of the estimate.

“James,” he said, “I’ve weighed the options and compared your quote to all the other ones I’ve received.  Yours was the best.  I’m ready to lock in my rate today.”

“I appreciate your business Colonel, but I’m unable to lock in the rate that I quoted you.”  I apologized.   “You might remember sir, that I told you the rate would only be good for 24 hrs.  The market ultimately determines rate movement.  Unfortunately, the market has pushed the rates higher since we last spoke.  However, you might be interested in the VA Hybrid ARM as an alternative.  In fact, given your desires to pay your home off faster I think this would be a better fit.”

“I told you I’m not interested in ARM’s.” he said flatly, and proceeded to list the same objections raised earlier.

“While I understand your objections sir, not all ARM’s are created equal.  The Hybrid Arm is a VA insured loan.  It is entirely different than those you are describing.  Consider the following:

  • The VA Hybrid loan does NOT adjust to whatever the bank wants  to set it at.  It moves in accordance with the rates of the US 1 yr Constant Maturity Treasury index.  Below is a graph reflecting the performance of the treasury index over the last 10 yrs.  You will see that the rate never moved higher than 6.33% .  The average rate over this 10 year period was around 3%.   In all this time, the index has never moved more than 1% in a year, and never in consecutive years.
  • You will enjoy a fixed rate of 3.75% for 60 months saving twice as much as the fixed rate option.
  • With the additional savings you can have all of your non-mortgage debt (credit cards, etc) paid off much faster, freeing up additional $ in monthly expenses.  These additional dollars can be leveraged into even greater principal reduction.
  • Your rate can never adjust more than 1% a year, regardless of what the index rate is.
  • Your rate does not automatically adjust up, it can just as easily adjust downward depending on the market
  • If your rate ever does adjust the loan will reset the payment based on the remaining balance.  By contrast, the payment on a 30 fixed rate loan is based off the loan amount at the time the refinance closes and will never change.  If you were to make the same payment on the VA Hybrid ARM as you would have made on the 30 year fixed option, the difference would be deducted from the balance each month.  By doing this, you could possibly have a lower payment, regardless of what the rate might adjust to.  (see VA 30yr Fixed Rate vs. VA Hybrid ARM comparison below.)
  • You will be able to obtain this rate for significantly less fees than the fixed rate

ratecharts15

Historical Chart

1 Year Constant Maturity Treasury Rate
Month 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Jan 4.51% 6.12% 4.81% 2.16% 1.36% 1.24% 2.86% 4.45% 5.06% 2.71% 0.44%
Feb 4.70% 6.22% 4.68% 2.23% 1.30% 1.24% 3.03% 4.68% 5.05% 2.05% 0.62%
Mar 4.78% 6.22% 4.30% 2.57% 1.24% 1.19% 3.30% 4.77% 4.92% 1.54% 0.64%
Apr 4.69% 6.15% 3.98% 2.48% 1.27% 1.43% 3.32% 4.90% 4.93% 1.74% 0.55%
May 4.85% 6.33% 3.78% 2.35% 1.18% 1.78% 3.33% 5.00% 4.91% 2.06% 0.50%
Jun 5.10% 6.17% 3.58% 2.20% 1.01% 2.12% 3.36% 5.16% 4.96% 2.42%
Jul 5.03% 6.08% 3.62% 1.96% 1.12% 2.10% 3.64% 5.22% 4.96% 2.28%
Aug 5.20% 6.18% 3.47% 1.76% 1.31% 2.02% 3.87% 5.08% 4.47% 2.18%
Sep 5.25% 6.13% 2.82% 1.72% 1.24% 2.12% 3.85% 4.97% 4.14% 1.91%
Oct 5.43% 6.01% 2.33% 1.65% 1.25% 2.23% 4.18% 5.01% 4.10% 1.42%
Nov 5.55% 6.09% 2.18% 1.49% 1.34% 2.50% 4.33% 5.01% 3.50% 1.07%
Dec 5.84% 5.60% 2.22% 1.45% 1.31% 2.67% 4.35% 4.94% 3.26% 0.49%

Source: Federal Reserve Board

VA HYBRID ARM vs. FIXED RATE OPTION

$300,000 VA 30yr Fixed Rate Loan at 4.75%

  • Monthly Mortgage Payment =                                                                                          $1564.94
  • Loan Balance after 5 years =                                                                                              $274,494.89
  • Mortgage Payment after 5 years =                                                                                  $1564.94  (payment never changes on a 30yr fixed loan)
  • Loan Balance after 6 years =                                                                                              $268,627.47

$300,000 VA Hybrid Loan at 3.75% making the 30 year fixed payment

  • Monthly Mortgage Payment =                                                                                           $1389.35 OR $175.59
  • Loan Balance after 5 years =                                                                                               $258,663.72 OR $15,831.17 lower than 30yr Option
  • “Worst Case” payment after first adjustment if rate adjusts to 4.75% =            $1482.06 OR $82.88 lower than 30 yr option at the same rate

After covering these options in detail, there was a long pause on the phone.  Finally, Colonel Mustard spoke, “So you’re telling me that for the next 5 years, I’m guaranteed to save $175 more per month that the other option, which isn’t even available?”

“Yes.” I replied.

“Is there a penalty for paying extra toward my principal balance?” he asked.

“Like all VA loans, there are no prepayment penalties or balloon payments on this product.  You are free to put as much as you like toward the balance as you like.  The Fair and Accurate Credit Transactions Act stipulates that any amount that you add to your payment above the required amount must be deducted from the principal balance.  Is that what you are planning to do?”

“Well yes, but on the other hand I’d rather use the money at first to pay off some credit cards and a pool loan. Would that put me at a disadvantage with the loan?” he asked.

“Not necessarily.  In fact doing so will likely be even more beneficial to you.  Most people tend to see their mortgage payments as separate from their finances.  The idea is to prioritize paying off your debt in order of the debts with the highest rates first, as opposed to the highest balances first.  How much non mortgage debt do you have that is at a higher rate than your VA mortgage?” I asked.

“Let’s call it around $15,000, for which I pay $400 a month.”

“Even better.  If you were to apply the monthly savings of $175 per month to this debt you would likely have it all payed off in just under 3 years.  By this time, you will have freed up $575 a month which you will enjoy for at least 2 years, guaranteed.  Remember, its all about the lowest monthly expenses.  If the VA Hybrid ARM lets you achieve this faster than the VA 30 year fixed loan then I think the answer is clear.”

“Okay.  One last question.  What if things change and I want to fix the interest rate?”  he asked.

“Low VA Rates offers a no-cost refinance for any return customer veteran wishing to refinance out of the Hybrid ARM.  Again, there would be no prepayment penalties associated with this.  Like the VA 30 year fixed option, you would still be eligible to defer two months payments and receive an escrow refund.”

An even longer silence.  But after what seemed like 2 minutes, Colonel Mustard spoke:

“Send me the paperwork.  This sounds good to me.  I appreciate your help.” he said.

“Happy to help, sir.  I will send that to you right away.  I would be happy to lock you in as soon as you send the signed disclosures back to me.”

“Sure thing.  I should have it to you in the next couple of weeks.” He said dryly.

“Uh…sir?”

“Just kidding , James.” he laughed.

“Right.  Good one, sir.  Thanks a lot.”

Flash forward back to the seminar.  I had just finished recounting the Colonel Mustard story and the room was quiet.  I could tell that many of the veterans were deep in thought.  I decided to break the ice.  “Listen folks, what you should take away from this is that, like loans,  not all ARMS are created equal.  Colonel Mustard happened to discover that the VA Hybrid ARM was the program that best fit his goals.  For those of you with stable income and a decent amount of debt, this might be a dream come true.  For others, a traditional fixed rate loan will be more beneficial.  At the end of the day it depends on the individual’s financial circumstances and goals.  But ask yourselves, if there are 30 year fixed conventional mortgages, yet you all still favor the VA 30 year fixed mortgage, doesn’t the VA Hybrid ARM deserve a second look apart from conventional ARMS?”

Oddly, this didn’t seem to break the silence.  However, just when I was begining to squirm, the questions started flying.  By the end of the seminar, four of the veterans had asked me to price out refinance options for them on the Hybrid ARM.

We all know that most active duty military personell live transient lives, being forced to relocate and move at every transfer.  Similarly, veterans, as well as the rest of the private sector are finding more and more that they are living in a transient society.   Americans move on average every 5 years (increasingly out of state) in search of work.  Furthermore, the vast majority of veteran homeowners simply do not stay in their homes for a 30 year term.  If we can accept this as true, then I believe that the VA Hybrid ARM deserves to be considered whenever a veteran is looking to refinance.  It won’t work for everyone, but it will work best for many.

In 2009, Veterans Need to Take Advantage of the VA Hybrid Loan

Fed loses control of interest rates

On February 19, 2009 the US government signed into law the $787 Billion Economic Recovery Plan in an attempt to stabilize our faltering economy and more specifically our housing market.

One of the main focuses of this new law was to drive interest rates lower, even to levels that had never been seen before in our history of tracking mortgage rates.

This plan was working until just recently. About two weeks ago, the government seems to have lost control of the interest rate markets, and yields and rates on mortgages and treasuries have been rising faster than ever before.

Time will tell what tricks the Fed may be able to come up with next in an attempt to drive rates lower. However, I want all eligible veterans to be very aware of a brand new loan product available to veterans that will allow you to have a fixed rate and payment for a minimum of 5 years and that rate is currently around 3.5%!

Backing-up-interest-rates

Eligible veteran home owners can still get rates as low as 3.5%

As part of the Veterans Benefits Improvement Act of 2008, the President signed into law the VA Hybrid Arm. This loan brought much-needed relief to a struggling housing market; however, very few lenders are proficient enough in VA home loans to really understand why the President approved this loan for veterans.

Because of our extreme media pundits these days, when most homeowners hear the words adjustable, variable, or ARM, they immediately put their guards up. This is too bad, because the VA hybrid loan is nothing like the ARM loans talked about in the media, nor should it be feared. Rather,it has many advantages that should be embraced by veterans, just as it has been by our governing officials!

Why is a VA ARM safe, while conventional ARMS are not?

VA ARM CONVENTIONAL ARM
Backed by the VA/Govt Not backed by anyone
Cannot rise for 1st 5 years could rise in one year in some cases
Can only change 1 time a year max Can change up to 2 times a year
Has a 5% max increase Can go up over 5%
Can refinance out of at anytime May have a pre-pay penalty keeping you in the loan

As you can see, there is a lot of safety and security in the VA hybrid arm that does not exist on other adjustable type loans. Check out a press release on this topic. Pay close attention to the part about Low VA Rates offering free refinance options!

I work with loan officers that have been offering this loan (VA Hybrid) to veterans that were waiting to refinance, and then were caught off guard when rates skyrocketed. To talk to our hybrid loan specialists at Low VA Rates, free to call us at (866) 569-8272.

Here are some helpful videos:

Video #1 about the VA Hybrid Loan

Video #2 on the VA Hybrid

© 2019 Low VA Rates, LLC™. All Rights Reserved. Low VA Rates, LLC™ is not affiliated with any U.S. Government Agency nor do we represent any of them. Corporate Address: 384 South 400 West Suite 100, Lindon, UT 84042, 801-341-7000. Alaska Mortgage Broker/Lender License No. AK-1109426; Arizona Mortgage Banker License #0926340; Licensed by the Delaware State Banking Commission License #018115; Georgia Residential Mortgage Licensee License #40217; Illinois Residential Mortgage License #MB.6761021; Licensed by the New Jersey Department of Banking and Insurance, Ohio Mortgage Loan Act Certificate of Registration #SM.501937.000; Oregon Mortgage Lending License # ML-5266; Rhode Island Licensed Mortgage Lender License #20143026LL; Texas License LOCATED at 201 S Lakeline Blvd., Ste 901, Cedar Park, TX 78613; EAH041719. Click on these links to access our Privacy Policy and our Licensing Information. Consumer NMLS Access - NMLS #1109426