Veterans and ARM Loans

One of the "evil villains" of the real estate crash of the mid-2000's was the ARM loan. ARM stands for adjustable rate mortgage, meaning its interest rate changes annually in relation to the 1-year Treasury Index plus margin percentage points added by the lender--and your payment could go up or down. 

They grew in popularity during the boom because the interest rate nearly always started at a lower interest rate than a fixed mortgage and made the initial payments less; therefore people were buying more house than they could afford--either banking on the hope that they would be making more money down the line, or not understanding that their payments would be rising, some sharply and out of reach, when the ARM readjusted. It was a perfect storm of uninformed home buyers, overzealous mortgage companies, government incentives, and a plentiful selection of shiny new homes.

However, ARM loans aren't all bad. For an informed consumer, including a veteran, they can be just the match you are looking for. The VA regulates ARM loans to where the interest rate cannot increase more than 1% per year and up to a maximum increase of 5%. For example, if your initial interest rate is 5%, your rate can go up as high as 10% if it increases by 1% over the next 5 years. It could also go down if the rate decreases. Lender's margin points differ from lender to lender, generally between 1-3%, and will also also affect your overall interest rate, so you're at an advantage to use a mortgage broker like those at Patriot Home Mortgage-Pacific Group who can compare the lender margin points of 40 different lenders and find you the best one. 

In most cases, a Hybrid ARM loan is the best option for home buyers staying in their home for three years. The initial interest rate of a Hybrid ARM cannot be adjusted for a minimum of 3 years. At that point, a home owner can sell their home before the interest rate changes or refinance to a traditional VA loan if they've decided to stay. This allows, in most cases, a lower mortgage payment for 36 months and a chance to pay off debts and keep credit in excellent shape to qualify for the lowest interest rate, should  you decide to refinance. 

If you want to know more VA loans, ARM loans, or Hybrid ARM loans, give us a call and we'll discuss your options!