ARMs provide the flexibility to start with a low interest rate that typically adjusts at pre-determined intervals over the life of the loan. This type of loan is ideal for veterans who may be looking to buy a home that needs renovations, make a larger purchase such as a car or college tuition, or simply take advantage of a lower interest rate before it increases.
Unlike many conventional loans that tend to have higher fixed interest rates than an adjustable-rate loan, VA loans have one of the lowest adjustable rate options available. This is partly because of the way the VA loans are structured, with the government guaranteeing part of the lender’s risk. Because the government is assuming some of the risk, lenders are more willing to offer borrowers lower interest rates.
When considering an ARM option, it's important to understand the two main types of ARM: Fixed-Rate Period ARMs and Introductory-Rate ARMs. Fixed-Rate Period ARMs come with an initial term where the interest rate stays fixed while the payment adjusts each year. After the initial term, rates adjust periodically as the market changes. On the other hand, Introductory Rate ARMs begin with an introductory period, where the rate is locked in for a specific amount of time (typically from 6 to 12 months). During this time, the payment is adjustable so the borrower does not pay for the full cost of principal and interest until the rate begins to adjust.
In addition to the two types of adjustable-rate loans, there are a few other important details to consider. First, borrowers should be aware if the loan has a rate cap. This means that the rate will not exceed a certain amount no matter how high the market rate goes. Second, they should also consider how often the rate and payments will adjust. Lastly, is the margin rate. This is the portion of the rate that is determined by the lender and is added to the index to calculate the new rate.
VA adjustable-rate mortgages are an excellent option for many veterans, especially those who are uncertain of how long they will remain in their home. The lower initial interest rate and the ability to lock-in an interest rate during the introductory period can be extremely beneficial and help borrowers save money over time. With a little research and the right loan officer, veterans can find a VA loan with an adjustable rate that best fits their budget and needs.
This article was contributed on Nov 10, 2023