VA adjustable-rate mortgage (ARM) loans come with lower initial mortgage rates than VA 30-year fixed loans. This can save a homebuyer money each month for years before the adjustable period expires.
What is a VA ARM loan? It’s a loan offered by lenders and sponsored by the Department of Veterans Affairs. It comes with an initial fixed-rate period – typically five years – then the rate adjusts with the market afterward.
Why would someone get one? If you’re just going to carry the loan for a few years anyway, there’s little point in paying a higher rate for a 30-year fixed loan. For instance, if you’re on active duty and plan to sell at your next PCS orders, an ARM might be a good choice.Check your VA ARM loan eligibility.
- A VA ARM comes in many varieties: 3/1, 5/1, 7/1. The first number indicates the fixed period. The second number is how often the rate can change after the fixed period.
- A VA ARM comes with borrower protections known as “caps.” VA ARM caps are 1/1/5, meaning the loan can adjust a maximum of 1% after the initial fixed period, 1% each year thereafter, and never more than 5% above the initial rate.
- These loans are 30-year mortgages. There is no balloon payment. After the fixed period, the payment adjusts based on the new interest rate and remaining balance.
Over the past decade, rates have been so low that most homebuyers chose a 30-year fixed loan. Now that rates are rising, an ARM might be a better choice. You can afford more home.
How is the rate determined after the initial fixed period?
- After the initial fixed period your rate will be determined by adding the index and the margin.
- For VA loans, the index is the one-year Constant Maturity Treasury, or CMT. As of September 2022, the CMT was 4.08%
- The margin is the percentage above the index that creates lender and investor interest income. A typical margin for VA loans is 2.0%.
- If your 5-year VA ARM started adjusting at the time of this writing, and your margin were 2.0%, your new adjustable rate would be 6.08% (4.08% index + 2.0% margin)
Use a VA streamline refi later on
- Mortgage shoppers tend to avoid adjustable mortgages because they fear rising payments later on.
- But you may be eligible for a VA streamline refinance later on. With this refinance, you can replace your ARM loan with a new fixed-rate one with no appraisal, no income documentation, and with fewer closing costs than a traditional refi.
- There’s no guarantee rates will be lower when your loan starts to adjust. But if they are, a VA streamline refi makes it easy to exchange your adjustable loan for a fixed loan.
When to choose an ARM over fixed
- When rates are high
- You can’t qualify for the home you want with a 30-year fixed loan
- You’ll sell or refinance within five years
- If you think rates will drop in the next five years
Buy a bigger home with a VA ARM loan
How much lower your VA ARM rate will be versus a fixed loan depends on your lender. Some companies will offer comparatively low rates, while some lenders’ ARM rates might be the same as their fixed rates. Shop around to find the lowest VA rates for your situation.
|VA Fixed Rate||VA ARM|
|Affordable monthly payment||$2,500||$2,500|
|Taxes, insurance, HOA dues||$300/mo||$300/mo|
|Max loan amount incl. funding fee||$368,000||$409,200|
|Max home price||$360,000||$400,000|
Mortgage rates are for demonstration purposes only. Rates and the difference between fixed and ARM rates may not be available. Get a personalized quote here.
- Choosing a VA ARM increases your buying power by $40,000 in this case.
- An adjustable rate loan with a lower rate can either lower your payment, enable you to buy a more expensive home, or both.
VA ARM alternatives
Standard adjustable-rate mortgages
- Conventional 3-year ARM
- Conventional 5-year ARM
- Conventional 7-year ARM
- Conventional 10-year ARM
- FHA adjustable-rate mortgage
Interest-only adjustable-rate mortgages
Yes. The VA home loan program allows fixed-rate and adjustable-rate loans.
A VA ARM rate can rise a maximum of 5% above the start rate. For example, a VA ARM with a 5% teaser rate could rise to 10%. The rate won’t automatically rise that much. The actual increase or decrease depends on interest rates at the end of the initial fixed period.
A VA ARM loan comes with a rate that can adjust up or down after its initial fixed period. It comes with a lower rate upfront compared to VA 30-year fixed rate mortgages.
The disadvantage of an ARM loan is that the rate can rise after the initial fixed period. This could cause your payment to rise. Most ARMs come with caps which limit how much the interest rate can rise at each adjustment period.
A VA ARM loan isn’t the answer for everyone, but it can reduce your payment in a time of rising rate and home prices.
Check with your lender and look at your situation. An ARM loan might make you a homeowner soon than you thought possible.Start your VA ARM mortgage.