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Benefits of a VA Hybrid Adjustable Rate Mortgage

06/24/2010
Veterans interested in taking advantage of the VA home loan program can choose from among three interest rate programs. Knowing the benefits of each can help interested borrowers determine which is best based on their financial situations.

One option is the VA fixed rate mortgage. As the name suggests, the interest rate remains unchanged throughout the loan term. Since the interest rate never changes, borrowers always know exactly what their monthly mortgage payments will be, and that makes budgeting easier. Borrowers are unaffected by interest rates increases. However, they won't be able to lower the interest rate on a fixed rate mortgage if the interest rate decreases.

Another option is the VA adjustable rate mortgage (ARM). The interest rate on an ARM changes and moves in the direction of the index to which the mortgage is tied.
Here's how the VA Hybrid ARM works

The third option, a VA Hybrid ARM, is a combination fixed/adjustable rate mortgage. What that means is that for the first three or five years, the mortgage has a fixed rate of interest. After that period, the interest rate changes from a fixed rate to an adjustable rate. The interest rate will adjust each year for the duration of the loan term which, in the case of a VA Hybrid ARM, is either 15 or 30 years. The amount the interest rate can adjust each year will not exceed one percent. Over the life of the loan there's an interest rate adjustment cap of five percent above the initial rate.

If the borrower chooses a 3/1 ARM, the first interest rate adjustment will occur 36 months after the date the first mortgage payment is made. If the borrower chooses a 5/1 ARM, the first interest rate adjustment will occur 60 months after the date the first mortgage payment is made.

The VA Hybrid ARM is tied to the 1-Year Constant Maturity Index and has a margin of 2.00 percent or 2.25 percent. Quarterly rate adjustments take place on the first day of January, April, July and October. The rate to qualify is the Initial Note Rate.

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