Most veterans I speak with are wary when it comes to the subject of adjustable rate mortgages, or ARMS. The perception is that at best they are uncertain, and at worst, they are disastrous. Many veterans I work with are on fixed incomes and can’t afford any more uncertainty in their lives, particularly when they are already battling to keep their credit cards at bay. Other veterans tell me that their goal is to simply pay off their home as quickly as possible, and that an ARM could potentially undermine this effort. Its hard to argue with this logic. For many, ARMs equal uncertainty. And having worked with many homeowners over the years, I would venture to say that veterans crave security more than most; a fact made even more apparent to me during a VA mortgage seminar my office held for some area veterans.
I began the meeting with a simple question: What do you know about adjustable rate mortgages? To my surprise, the veterans responded immediately.
“They lure you in with low rates, and as soon as you sign the paperwork your loan starts to adjust out of control.” one veteran warned.
“I heard that your rate is fixed for a short time, but after that the bank can raise your rate whenever they want to.” another interjected.
“Adjustable Rate Mortgages are the reason that we are in this banking crisis to begin with.” noted another.
“If you miss a payment the bank has the right to take your first born child.” cautioned a fourth.
Okay, the last one was made up, but you get the idea. I suppose what I found most intriguing about the question was that there was no shortage of responses and they were almost universally negative. Being that I was there to discuss the new VA Hybrid ARM product, I felt the best, most relatable approach would be to describe a recent experience with a fellow veteran who had opted for this product.
I recently took an application for a veteran named Colonel Mustard. I’ve changed his last name of course, but I can assure you all that this man was, in fact, a “full bird” colonel. I mention this because right from the get-go he let me know how the call was going to play out: He told me that he would only provide enough information to send him a loan quote for a VA 30 year fixed rate mortgage. Once I did he would compare my offer against several others, and if I was the best, he would call me. I took his application, prepared a Good Faith Estimate and sent it to him. As always, I explained to him that rates were date sensitive and were subject to change due to market conditions.
Although Colonel Mustard acknowledged this, he must have forgotten it immediately because two weeks later I received a phone call from him followed by a signed copy of the estimate.
“James,” he said, “I’ve weighed the options and compared your quote to all the other ones I’ve received. Yours was the best. I’m ready to lock in my rate today.”
“I appreciate your business Colonel, but I’m unable to lock in the rate that I quoted you.” I apologized. “You might remember sir, that I told you the rate would only be good for 24 hrs. The market ultimately determines rate movement. Unfortunately, the market has pushed the rates higher since we last spoke. However, you might be interested in the VA Hybrid ARM as an alternative. In fact, given your desires to pay your home off faster I think this would be a better fit.”
“I told you I’m not interested in ARM’s.” he said flatly, and proceeded to list the same objections raised earlier.
“While I understand your objections sir, not all ARM’s are created equal. The Hybrid Arm is a VA insured loan. It is entirely different than those you are describing. Consider the following:
- The VA Hybrid loan does NOT adjust to whatever the bank wants to set it at. It moves in accordance with the rates of the US 1 yr Constant Maturity Treasury index. Below is a graph reflecting the performance of the treasury index over the last 10 yrs. You will see that the rate never moved higher than 6.33% . The average rate over this 10 year period was around 3%. In all this time, the index has never moved more than 1% in a year, and never in consecutive years.
- You will enjoy a fixed rate of 3.75% for 60 months saving twice as much as the fixed rate option.
- With the additional savings you can have all of your non-mortgage debt (credit cards, etc) paid off much faster, freeing up additional $ in monthly expenses. These additional dollars can be leveraged into even greater principal reduction.
- Your rate can never adjust more than 1% a year, regardless of what the index rate is.
- Your rate does not automatically adjust up, it can just as easily adjust downward depending on the market
- If your rate ever does adjust the loan will reset the payment based on the remaining balance. By contrast, the payment on a 30 fixed rate loan is based off the loan amount at the time the refinance closes and will never change. If you were to make the same payment on the VA Hybrid ARM as you would have made on the 30 year fixed option, the difference would be deducted from the balance each month. By doing this, you could possibly have a lower payment, regardless of what the rate might adjust to. (see VA 30yr Fixed Rate vs. VA Hybrid ARM comparison below.)
- You will be able to obtain this rate for significantly less fees than the fixed rate
Historical Chart
| 1 Year Constant Maturity Treasury Rate | |||||||||||
| Month | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
| Jan | 4.51% | 6.12% | 4.81% | 2.16% | 1.36% | 1.24% | 2.86% | 4.45% | 5.06% | 2.71% | 0.44% |
| Feb | 4.70% | 6.22% | 4.68% | 2.23% | 1.30% | 1.24% | 3.03% | 4.68% | 5.05% | 2.05% | 0.62% |
| Mar | 4.78% | 6.22% | 4.30% | 2.57% | 1.24% | 1.19% | 3.30% | 4.77% | 4.92% | 1.54% | 0.64% |
| Apr | 4.69% | 6.15% | 3.98% | 2.48% | 1.27% | 1.43% | 3.32% | 4.90% | 4.93% | 1.74% | 0.55% |
| May | 4.85% | 6.33% | 3.78% | 2.35% | 1.18% | 1.78% | 3.33% | 5.00% | 4.91% | 2.06% | 0.50% |
| Jun | 5.10% | 6.17% | 3.58% | 2.20% | 1.01% | 2.12% | 3.36% | 5.16% | 4.96% | 2.42% | |
| Jul | 5.03% | 6.08% | 3.62% | 1.96% | 1.12% | 2.10% | 3.64% | 5.22% | 4.96% | 2.28% | |
| Aug | 5.20% | 6.18% | 3.47% | 1.76% | 1.31% | 2.02% | 3.87% | 5.08% | 4.47% | 2.18% | |
| Sep | 5.25% | 6.13% | 2.82% | 1.72% | 1.24% | 2.12% | 3.85% | 4.97% | 4.14% | 1.91% | |
| Oct | 5.43% | 6.01% | 2.33% | 1.65% | 1.25% | 2.23% | 4.18% | 5.01% | 4.10% | 1.42% | |
| Nov | 5.55% | 6.09% | 2.18% | 1.49% | 1.34% | 2.50% | 4.33% | 5.01% | 3.50% | 1.07% | |
| Dec | 5.84% | 5.60% | 2.22% | 1.45% | 1.31% | 2.67% | 4.35% | 4.94% | 3.26% | 0.49% | |
Source: Federal Reserve Board
VA HYBRID ARM vs. FIXED RATE OPTION
$300,000 VA 30yr Fixed Rate Loan at 4.75%
- Monthly Mortgage Payment = $1564.94
- Loan Balance after 5 years = $274,494.89
- Mortgage Payment after 5 years = $1564.94 (payment never changes on a 30yr fixed loan)
- Loan Balance after 6 years = $268,627.47
$300,000 VA Hybrid Loan at 3.75% making the 30 year fixed payment
- Monthly Mortgage Payment = $1389.35 OR $175.59
- Loan Balance after 5 years = $258,663.72 OR $15,831.17 lower than 30yr Option
- “Worst Case” payment after first adjustment if rate adjusts to 4.75% = $1482.06 OR $82.88 lower than 30 yr option at the same rate
After covering these options in detail, there was a long pause on the phone. Finally, Colonel Mustard spoke, “So you’re telling me that for the next 5 years, I’m guaranteed to save $175 more per month that the other option, which isn’t even available?”
“Yes.” I replied.
“Is there a penalty for paying extra toward my principal balance?” he asked.
“Like all VA loans, there are no prepayment penalties or balloon payments on this product. You are free to put as much as you like toward the balance as you like. The Fair and Accurate Credit Transactions Act stipulates that any amount that you add to your payment above the required amount must be deducted from the principal balance. Is that what you are planning to do?”
“Well yes, but on the other hand I’d rather use the money at first to pay off some credit cards and a pool loan. Would that put me at a disadvantage with the loan?” he asked.
“Not necessarily. In fact doing so will likely be even more beneficial to you. Most people tend to see their mortgage payments as separate from their finances. The idea is to prioritize paying off your debt in order of the debts with the highest rates first, as opposed to the highest balances first. How much non mortgage debt do you have that is at a higher rate than your VA mortgage?” I asked.
“Let’s call it around $15,000, for which I pay $400 a month.”
“Even better. If you were to apply the monthly savings of $175 per month to this debt you would likely have it all payed off in just under 3 years. By this time, you will have freed up $575 a month which you will enjoy for at least 2 years, guaranteed. Remember, its all about the lowest monthly expenses. If the VA Hybrid ARM lets you achieve this faster than the VA 30 year fixed loan then I think the answer is clear.”
“Okay. One last question. What if things change and I want to fix the interest rate?” he asked.
“Flagship Financial offers a no-cost refinance for any return customer veteran wishing to refinance out of the Hybrid ARM. Again, there would be no prepayment penalties associated with this. Like the VA 30 year fixed option, you would still be eligible to defer two months payments and receive an escrow refund.”
An even longer silence. But after what seemed like 2 minutes, Colonel Mustard spoke:
“Send me the paperwork. This sounds good to me. I appreciate your help.” he said.
“Happy to help, sir. I will send that to you right away. I would be happy to lock you in as soon as you send the signed disclosures back to me.”
“Sure thing. I should have it to you in the next couple of weeks.” He said dryly.
“Uh…sir?”
“Just kidding , James.” he laughed.
“Right. Good one, sir. Thanks a lot.”
Flash forward back to the seminar. I had just finished recounting the Colonel Mustard story and the room was quiet. I could tell that many of the veterans were deep in thought. I decided to break the ice. “Listen folks, what you should take away from this is that, like loans, not all ARMS are created equal. Colonel Mustard happened to discover that the VA Hybrid ARM was the program that best fit his goals. For those of you with stable income and a decent amount of debt, this might be a dream come true. For others, a traditional fixed rate loan will be more beneficial. At the end of the day it depends on the individual’s financial circumstances and goals. But ask yourselves, if there are 30 year fixed conventional mortgages, yet you all still favor the VA 30 year fixed mortgage, doesn’t the VA Hybrid ARM deserve a second look apart from conventional ARMS?”
Oddly, this didn’t seem to break the silence. However, just when I was begining to squirm, the questions started flying. By the end of the seminar, four of the veterans had asked me to price out refinance options for them on the Hybrid ARM.
We all know that most active duty military personell live transient lives, being forced to relocate and move at every transfer. Similarly, veterans, as well as the rest of the private sector are finding more and more that they are living in a transient society. Americans move on average every 5 years (increasingly out of state) in search of work. Furthermore, the vast majority of veteran homeowners simply do not stay in their homes for a 30 year term. If we can accept this as true, then I believe that the VA Hybrid ARM deserves to be considered whenever a veteran is looking to refinance. It won’t work for everyone, but it will work best for many.
James Shergill is a nine year veteran of the mortgage and financial services industry. You can reach James Shergill by calling 801-341-7023 or toll free at 888-657-2848. After graduating from the University of California Davis, in 2000, James began his career at Smith Barney, and subsequently, E*Trade Financial as a junior broker representative. He made the transition into the mortgage industry in 2001 and enjoys spending time with his wife and daughter.Tags: adjustable rate mortgage, arm, va arm, va arm loan, va hybrid arm, veteran arm loan
What is the rate at this moment.(best rate in town). what determines whether you get 3years or 5 years initialy.
what detemines how many initial years you get, i.e. 3 or 5 years for the initial fixed rate. what is the best rate at this time available.
@samuel – The VA offers the hybrid loan with a three or five year fixed payment. As the borrower, you can choose which fixed payment is best for you. The rates on the three year VA Hybrid loan is usually 0.125%-0.25% lower than the five year hybrid.
Thanks for the questions.
Does credit rating count? If so how?
Hello, I received a flyer in the mail for a refi on my VA loan which is at 5% fixed for 30 years. The person who came to my home is trying to sell me a 3/1 VA hybrid loan. I am really nervous about giving up the security of a fixed rate loan for an ARM but am also interested in the feature of the ARM that at the reset date, resets at the lower balance which in theory would mean lower payments if the interest rate does not rise. What would be your advice on this. The VA hybrid has a starting rate of 4% for the first 3 years and then can only raise 1% per year with a cap of 5 years.
@ samuel
Not all hybrids are created equal. Without knowing your exact situation my ability to advise you effectively is limited. There are a few questions I would need answered in order to evaluate the loan quote you’ve received. Its probably more appropriate to discuss this matter personally. Please feel free to contact me at 888-657-2848 ext 252. Id be happy to help.
I have the same situation as Zane dated July 25th. Would it be alright to contact you for some advice.
How can I find a mortgage calculator this this type of loan?
[...] a previous blog post, I discussed the benefits offered by the VA Hybrid Loan programs. By now, more veterans than ever [...]
I currently have a 30 yr loan and would like to refinance for a 15 yr loan. How would I determine if a hybrid is what is best for me? My current interest rate is 5.625.
hybrid loans have to be on 30 yr schedules. I would say go to the tools page on lowvarates and plug your figures into the va debt reduction calculator. Good luck. Try calling 888-657-2848 also.
do you do colorado investment properties, its currently a va loan at 4.875. i would like the hybrid but cant find anybody to do the loan in colorado. please call 336-639-8099
We have been approached with this VA Hybrid Arm from our 30 yr fixed with 5.5% interest rate. Our current mortage company is really advising against this hybrid arm loan, of course. I am intriged with the aspect of the adjustment after 3 years is based on the current principle amount not the original loan amount. We are planning on staying in this home permanently so the assurtion that the hybrid arm is good only for the short term home owner doesn’t apply to us. Can you give any advice to us, we actually only have about 3 days to decide so I am very nervous. please call me at 253-332-1712 or return email
I know you are probably very busy but I appreciate your help.
We bought a house in Jan 2010 in the MD area. VA 30 year fix @ 4.75. Looking at a lower rate like 2% possible under the hybrid ARM for 3 or 5 years?
give us a call at 888-657-2848 and we can help. that 2% rate is impossible though. Did you realize fixed rates are now much lower than your 4.75%?
My current principal balance is 393,600 with an IPR 4.5 / APR 5.0
A mortgage company approached me with a VA Hybrid Arm loan 3/1 and suggested (GFE) a 3.0 IPR / 2.71 APR increasing the loan amount to 426, 570, with and amount financed of 410,494. {I do not know why the difference of 16K is deducted from the loan amount ;-(
Origination Charges: 12, 511
Charges for other settlement services: 10,437
Initial monthly P&I: $1798
I did my calculations:
a) if I continue paying the current P&I of 2,041 for 36 months I would pay about $73.5K (393.6 – 73.5 = 320.1)
b) paying the 1,798 for 36 months = 64, 728
so, 426,570-65K = 361K [ 41K more than the previos fixed rate loan]
c) or using the 410,500 – 65K = 345.5k [ 25K more than the fixed rate ]
Am I right, or am I missing something?
Please call us at 888-657-2848
We’ve been approached by Mortgage Investors Corp. out of Saint Petersburg, Fl. to change our fixed VA 4.5% 15 year mortgage to the VA hybrid ARM of 3 % for 3 years. They asked for a good faith down and we gave it to them, but are not locked in untill closing on Tuesday. Is it a safe company and a safe loan? I need to extend my 15 year to a longer term to lower my payment. Are we making a mistake? We just got the original VA loan a year ago and hate to pay closing costs again, but we have run into a bit of a financial pinch and the payment straps us. The new payment gives us room to breathe, but is the company ok and is the loan a good bet?
VA does NOT allow you to go from a 15 yr loan to a hybrid loan unless you are doing the FULL appraisal, sending in income documents etc. Are they pitching this as a streamline loan or another type of loan? I do not know MIC personally but this sounds suspect as it is not a normal thing the VA allows. None of our lenders require any money down. The VA does NOT require money down either. It seems like a way to tie you down to me. I know you can get it back if you want though. Give a call to us and ask for the branch manager and reference that you are concerned with mortgage investors.
http://www.ripoffreport.com/mortgage-companies/mortgage-investors-c/mortgage-investors-corporation-7pmfc.htm
We were approached by Mortage Investors Corp out of Saint Petersburg, FL and we also got their sales pitch. Of course at the end of the presentation, they said that we needed to give them $100.00 but this would come back to us. They threw around that they have VA backing and such. I do not have any good feelings about this. Can we get an VA Hybrid ARM at our current Bank (Bank of America) who we know and somewhat trust? They also said that they would keep the loan only for 2 years and sell to someone else. Please advise
I did my VA hybrid this week and save app 400 a month in insurance and payment from 1600 to 1200 plus the 1200 3x as much goes to principal now plus the leftover from my reduced payment, adiitionaly paying off my debt witt tax returns im looking at a plus of almost 700 dollars a month by using the Hybrid, and i skip two morgage payments and recieve 3k in escrow back from my previous lender. It is a good deal
You can for sure got to Bank of America, but why not come here to Low VA Rates? We will not charge anything up front like MIC does and we will fix the loan for 5 years, NOT 3
I to was contacted by MIC of St. Petersburg FL. and was quoted the same in regards to the VA hybrid loan. What the agent/rep stated to me was the this loan would maintain an interest rate of 3% for about 38 months. Then it would adjust as reflected by the CMT at the time. He stated that if the CMT was higher, regardless of how high, the rate would not increase more than 1 point/percent per year and would never exceed 8% at any time during the 30 year loan. That does not seem to match your chart above.
He also stated that the interests was only paid on the amount of the principal balance. His selling point of the mortgage was that regardless of what the rate after 38 months making steady payments, the principal will go down and so will the amount on my payments therefore I would always be paying well below my current mortgage payment while paying more toward my principal. Is any of this true?
P.S. I did check MIC out at ripoffreport.com and the BBB. Ripoffreport stated them to be a legal operating business, while there were mixed reviews from clients on their site. BBB gave them a B- on a scale of A – F and stated that MIC were not active members of BBB. They stated that MCI had 270 plus complaints, while a report on Bank of America on the same site listed in the thousands of complaints far worse than MIC, yet had an A rating. BOA are active members. Perhaps the purchase of a $400 plaque could be a factor in the score card?
I was contacted also by this MIC Mortgage investors corp. My numbers are, current loan balance of 288,000 at 4.75 percent rate 30yrs. Prior to MIC contacting me I refi my loan to a 4.75 a few months ago. The total for the Hybrid va loan will be 303,003.00. So the loan will cost me 15003.00 , 303,003.00 minus 288,000.00 . But will save 224.87 each month on the mortgage for a total of 8545.12 in 38 months and 120,000 on the interest over the 30yrs on the hybrid. I have not yet signed but was told to make a payment of 3000.00 as a good faith and would get back when we close. I settled on 1500.00 only but still worried if this is a good deal for me and my wife.
Never make a payment of good faith for a VA loan. Your military service is good faith enough. I hope you have called in and spoken to one of our loan officers by now. We would love to give you a much better deal than what MIC is offering. You will have way less costs with us and lots of savings!
[...] [...]
We also spoke to MIC and they sound perfect for us…that was until I read about not making a payment on the GOOD FAITH. We were asked to make the escrow payment of $1700, but there is no way we could manage that..so we decided on $400..but still paid alot in fees..like $1800 just for processing..is this normal?
absolutely abnormal. Did you google MIC and VA loans before? Please do that and you will see all sorts of information. Are you already closed and funded? If not then cancel and give us a call.
DID I SCREW UP BY PAYING 200.00 IN GOOD FAITH TO MIC, I HAVE A CLOSING IN 7 DAYS, IAM A LITTLE CONCERNED
Screw up? No but as mentioned in many posts, there is no reason to ever pay out of pocket. This is an old tie down technique. The good news is on the VA loan unless an appraisal was done, this fee is 100% refundable. It is not too late to make sure you are getting the best deal possible. Give us a call right away at the number on our site. We look forward to assisting you
Hello, I am very glad I found this site. I had met with MIC and had an appt to close. We also gave them a good faith payment. We did end up canceling the appt, but I cannot get any other company to call me back about doing a VA Hybrid loan. We live in Colorado Springs, can you recommend any one in this area to refinance with?
Looking at applying for this loan refinance, a little leary about the ARM, I understand paying on the money owed rather than the money borrowed and the low and high end, just want to know how people that have this loan feel about it right now! bleubirdd@aol.com
I wish I was a Veteran and could get it. We are seeing many happy clients take advantage of the hybrid arm and loving it. It is not always the best loan for everyone, but normally it is your best option.