You’ve heard about the fantastic terms associated with the mortgages offered by the home program of the U.S. Department of Veterans Affairs (VA), but you have your heart set on using an adjustable rate loan. Fortunately, you don’t have to choose between the two. VA adjustable rate mortgages are available.
VA Adjustable Rate Mortgages: What You Need to Know
If you’re interested in using a VA adjustable rate mortgage, what do you need to know? Knowing the benefits of a VA loan is a good start. Understanding the mechanics of an adjustable rate mortgage and the rules that govern a VA adjustable rate mortgage also helps.
The Benefits of a VA Loan
Why are VA loans so popular? As the VA notes, these loans come with some attractive benefits. For starters, eligible borrowers can take advantage of relaxed qualifying standards, and the terms and interest rates that you’ll be offered with a VA loan are normally better than you’ll find elsewhere. How much can you borrow? With suitable credit and income, you can be approved for a loan up to the conforming loan limit with no need for a down payment. A larger loan is possible if you have suitable credit and are willing to make a down payment. There’s also no requirement for private mortgage insurance, a limit on closing costs, and a ban on prepayment penalties.
The Mechanics of a VA Adjustable Rate Mortgage
As Military.com explains, a VA adjustable rate mortgage has the same mechanics as other adjustable rate mortgages. That means that you’ll want to pay attention to these four parts:
- The Index: This is a value that determines the movement of your interest rate. It’s often tied to the London Interbank Offered Rate, the maturity yield on one-year Treasury bills, or the 11th District cost of funds index.
- The Margin: When it’s time to adjust your interest rate, this amount is added to the index.
- The Adjustment Cap: This is a safeguard that limits how much your rate can adjust at any given time.
- The Lifetime Cap: This sets the ceiling for how high your interest rate can go.
VA Adjustable Rate Mortgage Rules
With an adjustable rate mortgage, a borrower starts out with a lower interest rate that rises as time passes and the loan matures. Borrowers opting for a VA adjustable rate mortgage can choose from two formats. With the traditional version, borrowers face annual adjustments after the introductory periods. Alternately, borrowers can pick a hybrid loan that locks the fixed rate for an extended period before beginning to adjust. Hybrid VA adjustable rate mortgages are described as 3/1, 5/1, 7/1, and 10/1. The first number defines the length of the time that the borrower enjoys the fixed rate. The second number reveals how frequently the loan will adjust once that period is over. Therefore, a 5/1 loan will have a fixed rate for five years before its interest rate begins adjusting annually.
According to MilitaryTimes, there are certain rules that govern these loans that borrowers should be aware of:
- Traditional Adjustable Rate mortgages: The annual interest rate adjustments for these loans cannot be more than 1 percentage point. Over the life of the loan, rate increases cannot exceed 5 percentage points.
- Hybrid Adjustable Rate Mortgages: Hybrid loans with a fixed rate for less than five years are not allowed to adjust by more than 1 percentage point at the end of that period. Over the life of the loan, the total adjustment must not exceed 5 percentage points. What about hybrid loans with a fixed rate for five years or more? They cannot adjust by more than 2 percentage points at the end of that period, and the total adjustment must not exceed 6 percentage points over the loan’s lifespan.
Getting the most out of your VA housing benefits can be tricky. If you want to explore the pros and cons of a VA adjustable rate mortgage, reach out to PrimeLending: Manhattan, Kansas. Our team of friendly, knowledgeable loan experts has experience with the VA loan program, and we’re ready to put our insights to work for you. Contact us today to get started.