The VA Hybrid Loan Option That was not Offered When You Bought Your Home
Veterans please tell me you have had this experience – You recently got a VA home mortgage, and almost every day since closing on your home you find that you have at least 2 or 3 pieces of mail regarding a VA refinance option. You think to yourself “Are you kidding me? I just closed on my house. Not interested!”
A Common Experience To Have as a New VA homeowner
For several weeks you ignore these ads and chuck them in the trash because you have a 30 year fixed rate, and you think “All these flyers must be coming from lenders trying to take advantage of me and rip me off.”
After fighting the urge for a couple of months, you or your spouse gives in and decides to simply call to investigate. You choose the ad with the lowest advertised rate and call to find out if it’s regarding a 30 year fixed rate. Turns out that when you call the Loan Officer begins to explain something to do with a Hybrid program (which is clearly something other than a fixed). Your mind explodes with red flags and you shut down. Since your guard is up you cut the person off and say– “If it’s not a 30 year fixed I’m not interested!” and you hang up.
You could have listened and learned about the Hybrid loan.
This may shock many Veteran homeowners, but the VA’s Hybrid loan program may really be the absolute best loan option you have access to and was designed to be a major benefit to the Veteran community.
Let me back up and “set the stage” before explaining the inner workings of the VA’s Hybrid program.
The flaw of trying to effectively plan for 30 years
The following questions on the surface may not seem to be relevant to the topic of mortgages, but please indulge the exercise and answer the following questions:
- What job will you have in 15 years and who will be your employer?
- How much money will you be making in 6 years? More? Less?
- How will your health be in 10 years?
- What exact car will you be driving in 20 years?
- How many appliances will need replacing or will already have been replaced in your house in the next 8 years? (A/C, water heater, Kitchen etc…)
- How much are your children going to cost you in 7 years? (Soccer camp, medical bills, school fundraisers, etc.)
The questions asked are to help illustrate that most households can’t accurately predict what needs will come up 7-10 years down the road let alone 30 years.
Understanding Critical Statistics about home mortgages
- Based on all mortgages (53.3 million mortgages outstanding) the average life of ANY mortgage is 7.5 years.1
- According to Freddie Mac data, since 1999 home mortgages get refinanced an average of every 3 years.1
- Based on the numbers, only a total of 7% of homeowners stays on their loan longer than 7 years.1
- More than 85% of homeowners get sold on a 30 year fixed mortgage.1
Is the 30-year Fixed mortgage really your best option as a Veteran?
If the overall average homeowner is refinancing their mortgage at least every 7 years or less (and the current average since 1999 is 3 years), is there a better mortgage program than the 30 years fixed?
I am happy to tell you that, as a Veteran, you have several loan options that are much better than a standard 30 years fixed mortgage. For those that prefer a 30-year mortgage because of the low stable payments, I’m also happy to say that you could love the VA’s Hybrid loan programs.
Hybrid loans explained piece by piece
- The VA Hybrid loan is a 30 year fully amortized mortgage. This is characteristic is just like a 30 year fixed mortgage. (Please note that ‘fully amortized’ means that every payment goes towards paying the loan balance down. You never just pay interest like a risky Interest Only ARM loan)!
- VA Hybrid loan interest rates historically have an initial rate that is about 1%-2% below the going fixed offered by mortgage lenders. Example: The current 30 year fixed rate is roughly 4.0% and the absolute lowest 3 years Hybrid is around 2.25%.
- At the start of your Hybrid loan, your interest rate, loan terms, and payment structure are identical to the 30 years fixed structure for 3 years, 5 years, or 7 years depending on which hybrid loan program and you select.
- Please note that since the rate is locked 1%-2% lower during the first several years this is a powerful benefit to understand on a fundamental level.
- All mortgages make you pay the highest ratio of interest per payment during the first several years of the loan. It’s only until after the halfway mark of your repayment schedule that the amount of principle reduction becomes greater than the interest payment made per payment.
- After the initial term period of 3/5/7 years is over (depending on which hybrid loan program you get on), 2 vital things will happen at the beginning of the 4th,6th, or 8th year.
- #1 your loan will re-amortize to be based on your unpaid principal balance and years remaining on your loan. This is always a good thing and always in your favor! This ensures that the lender can’t charge you interest on money that you no longer owe them! (Fixed rate programs don’t re-amortize ever)
- #2 your introductory interest rate will expire and your rate will be adjusted based upon VA Hybrid guidelines. Those guidelines are as follows:
- The VA uses the CMT Index (1 Year Treasury) to calculate if an increase or decrease to your interest rate will happen.
- The VA has an annual hard cap of 1% UP or DOWN
- The VA has a lifetime hard cap of 5% to protect from ever having an outrageously high-interest rate.
Here is an example of a realistic Hybrid scenario:
John and Susan got a loan for $220,000 in May 2015 at 2.75% on a VA 5/1 Hybrid. If John and Susan make minimum payments on their mortgage, in June 2020, their loan balance would be $194,690. At this point on the Hybrid, the new lower loan balance would become John and Susan’s new loan amount and would be based on the 25-year term remaining on the loan. The other thing that will happen at this time is that John and Susan’s introductory 2.75% would now be adjusted based on the CMT 1 year treasury index. Their worst case rate could now only be 3.75% because of the 1% annual hard cap the VA has. If the worst interest rate scenario plays out then the new loan terms of $194,690 at 3.75% would be locked in for the next 12 months. Every 12 months from this point going forward the loan length decreases as does the loan amount and the rate could change up or down only a maximum of 1% annually and keeping in mind the lifetime hard cap of 5%.
In contrast – if John and Susan got a 30-year Fixed rate on their $220,000 at 3.75% guess where their loan amount would be in June 2020? The loan balance would be $198,170 and the repayment schedule would remain to be based upon the $220,000 and 3.75% from 5 years previously. This means that they would have had a larger minimum payment for their mortgage and their loan would be carrying roughly a $3500 higher balance.
Time for a reality check
Since we know that less than 7% of homeowners will be on their current mortgage after 7 years why are Veterans not jumping all over the Hybrid loan option? Why is it that 85% of home loans are 30 year fixed mortgages?!
Answer: Every lender is a business and these loan options don’t even see the light of day during the negotiation of the loan. What do lenders want most?! MONEY! They want to take as much of your money as your will gladly give them. Trust me, banks know the stats of how long people keep mortgages. They have done everything they can do to position themselves to seem like they are doing you a favor giving you a fixed rate for 30 years. What they have actually done is tied a financial ball and chain to you by giving you a fixed original loan amount and they are playing the odds to their favor. They figure that you will be like 93% of Americans that will refinance within the first 7 years of owning your home.
I know that this article doesn’t give you every shred of historical data, but it hopefully gives you some things to try and reconcile when it comes to which mortgage is ACTUALLY best for your home.
If you wish to learn more, please click and watch the video link below. It further explains the differences between the VA Fixed and Hybrid loan programs: Video Presentation: 30 Year Fixed vs VA Hybrid Loan
Originally from the state of Florida, Michael Dame is one of our newest additions to the branch and we are excited to have him! Mike is a graduate from the University of Florida where he earned a degree in Music. His passion and ability for connecting with people has turned into an invaluable asset as a Licensed Loan Originator. Though Michael is rather new to the family, he has already proven his ability to meet the demands of our clients and the job! We are excited to have him as a Loan Officer.