Understanding the VA Hybrid Loan

UnderstandingVAHybrid
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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

 

Why You Should Choose an Adjustable Rate Mortgage with Interest Rates Rising

Working as a mortgage broker, I am constantly asked by potential clients what the benefit of an adjustable rate mortgage is, and why they should opt for that mortgage product over the 30 year fixed. This can be a difficult question to answer because adjustable rate mortgages have been misunderstood.

You might be surprised to know many people are still choosing adjustable rate mortgages—especially as we are seeing interest rates rise. The fact is, adjustable rate mortgages can be a great financial opportunity. Here are some of the reasons why:

  1. Some of the Lowest Possible Mortgage Rates — Interest rates are currently among the lowest in history and adjustable rate mortgage loans are one way to bring them even lower. An ARM has a fixed period where the rate won’t change, usually is 3, 5 or 7 years. The rate is lower, often a lot lower, than the more popular 30 year fixed rate mortgage. The market rate for an ARM today is lower than the current 30 year VA mortgage.
  2. Benefits for Those Who Aren’t Planning to Stay in a Home Very Long — Because homeowners know they are only in a fixed-rate period for a short amount of time, an Adjustable Rate Mortgage is best used if you know you are moving before the fixed-rate period is over, if you plan on using the money saved by the lower interest rate to pay more towards your principal or if you’re planning on refinancing before the ARM begins to adjust.  The current trend among VA loans is to refinance every 5 to 7 years.  So this make the adjustable rate mortgage very enticing.
  3. Lower Payments on Your Loan — Even including closing costs on a refinance, you are paying less money during the fixed-rate period over a traditional mortgage. For example on a $200,000 home loan, if you were to get a 30-year fixed-rate mortgage at 5.25%, your monthly payments would be $1,104 a month. If you were to get a 5-year ARM at 3.99%, your monthly payments would be $953 for the first five years, for a 5-year savings of $9,060. Add in closing costs, at roughly $2,000, and you will still pay approximately $7,000 less of your hard-earned money during the fixed-rate period.
  4. The Possibility of Rates Adjusting DownMost people assume that after the fixed period expires, their rate will rise. This is not always the case. You could start with a 5-year ARM at 4.25% and when it becomes time for the rate to adjust, market prices may be considerably lower. This can prove to be quite a bit of savings for you to pay towards the principal of your home, or use the money to pay off debt.  On top of that, when the rate does adjust, your payment is based on the current principle balance of your loan.  In a 30 year fixed your payment is the same for the entire 30 years, whereas the ARM payment adjusts with principle balance.
  5. More Commonly Used Than You Might Think — In the United States, many financially-savvy people choose an ARM, mainly because you can save money during the initial fixed-rate period. In fact, in countries like England, variations of ARMs are the only type of mortgage available. This is often due to the fact that you can pay more towards the principal of the loan, early and without penalty. Early reduction payments reduce the total cost of the loan and allow you to pay off your loan in less time.

The thing to keep in mind with the current housing market is that interest rates are on the rise. Rates have been trending higher all month because of good economic reports. The markets reacted to mixed signals from the Federal Reserve that raised the possibility it might begin to slowly taper the purchased of mortgage backed securities. Those purchases have helped keep the interest rates so low.

By the end of this year, we could see rates higher but not by a lot. Rates could hover anywhere between 4.25 and 4.75 percent on a 30 year fixed mortgage which is up from the current par pricing of 3.75 percent. We could see refi’s drop to half or slightly more than that of all mortgage applications by the end of the year.

Even though refinance application are down nationally, we are beginning to see that loan customers are considering different loan products, namely adjustable rate mortgages because they offer such low rates for periods of up to 7 years on a VA Hybrid.

Consider the following: Most 30 year mortgages are only on the lenders books for a period of 5 to 7 years before the consumer refinances again. With VA Hybrid rates at or below 3.5%, they are a great option for anyone looking to lock in savings.

Remember, while Adjustable Rate Mortgages may save you money over the fixed-rate period, they may not be for everyone. Make sure you talk to your mortgage lender to determine if an ARM is for you; you’ll want to know all the facts, like whether your lender has prepayment penalties, before signing.

Make sure you are aware that while rates can go down, this means they also can rise as well. If you are aware of the risks and have a firm understanding of how an ARM works, then it can prove to be a very positive experience for you.

VA Hybrid Loan 101

There are many misconceptions and lack of knowledge surrounding the VA Hybrid loan among veteran homeowners.  The recent housing crash has created an atmosphere to completely shun any loan that is not a fixed rate.  Even the mention of the word “adjustable” rate probably just made your skin crawl.  In general, we don’t like the sound of the word “adjustable” because we automatically assume the interest rate on our home will eventually balloon to outrageous rates.

Notice the VA “Hybrid” loan does not mention the state itself as an “adjustable” rate.  When we are talking about any home loans outside the traditional “fixed” loans, our thoughts start shifting towards “adjustable” and we automatically dismiss the loan as a viable option.

Because of the negative connotation surrounded by home loans not fixed, many veterans can miss out on a great opportunity to save a lot of money and pay off their home loan significantly faster.

Without getting into too much detail about the VA Hybrid Loan, let’s talk about the basics and give three reasons why the VA Hybrid loan can be a great option for veteran homeowners.

 

VA HYBRID INTEREST RATES ARE ALWAYS LOWER THEN FIXED RATES

This is the simplest reason to consider a VA Hybrid Loan. For example, if the fixed 30-year loan rates are 4% the VA Hybrid loan will typically be at 3% and many times lower.  Many homeowners will refinance to get a full point lower on their interest rate, but do not even consider going to a VA Hybrid loan that is MORE than 1% lower.  A 1% lower interest rate can equal thousands and thousands of dollars over the life of the loan.

Many homeowners looking to pay off their mortgage faster should consider getting a VA Hybrid loan and making larger payments to a lower monthly cost.  It’s simple math.  A lower interest rate can help you pay off your loan faster and save money.

 

VA HYBRID LOANS ARE FIXED FOR 5 YEARS

It’s well-known fact that military families are constantly on the move.  I want you to think back on your career and figure out how many military stations you stayed at longer than 5 years?  Probably not many.   Since the VA Hybrid Loan is fixed for 5 years, homeowners get a much lower interest rate and by the time they move and sell their home they saved hundreds to thousands of dollars on unnecessary interest on their fixed 30 year loan.

Even if you happened to stay in your home for 10 years, the amount of interest you paid down in the first 5 years could greatly outweigh the rate adjusting.

 

VA HYBRID LOANS CAN ONLY MOVE UP 1 POINT PER YEAR

This is probably the most common misconception with the VA Hybrid Loan.  In fact, you probably thought in your mind, “After 5 years I don’t want my interest rate balloon to an outrageous amount.”  The simple answer is IT CAN’T.

Homeowners often forget to consider that VA Hybrid loan interest rates can also GO DOWN, but no more than 1 point per year.  If VA interest rates decrease, there is a very good chance your VA Hybrid loan will go down.

 

Potential homeowners should not be afraid of the VA Hybrid loan and many veterans would save thousands of dollars by taking advantage of the VA Hybrid loan.  As always, make sure to speak with a professional loan officer at LowVARates.com to discuss the best possible options for your unique circumstances and make sure to ask about the VA Hybrid loan.

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