Common Myths about VA Hybrid ARMs Debunked Part 1
There are plenty of myths and misconceptions about the VA hybrid ARM program that have been perpetuated both by well-meaning but misled individuals and by intentionally deceiving parties that stand to profit by having fewer borrowers choose any kind of adjustable-rate mortgage. This article will address two of the four most common myths about ARM loans in general, but primarily about the VA hybrid ARM program. See part two here.
1. My payment will go up when my rate starts to go up.
While this certainly can happen, and even happens with some frequency, your monthly payment can actually stay lower than it would have been on a fixed-rate mortgage even if the rate goes up. Considering that as of the writing of this article, a common interest rate on a fixed-rate mortgage is 4.5%, and the most common starting rate on a VA hybrid ARM is 2.25% for the first three years, the hybrid ARM rate would have to literally double before it got as high as the fixed-rate mortgage.
The VA hybrid ARM program limits the amount a rate can adjust to one percentage point each year. In other words, after three years of 2.25% (which already saves you a bundle of money), the highest it could jump to is 3.25%, still a solid 1.25% lower than what you’d be paying on a fixed-rate. Even if it jumps a full percentage point at the end of the three years, and another full percentage point the year after that (pretty unlikely scenario, by the way), you would still be going into your fifth year on the mortgage with a rate of 4.25%, still a quarter of a point lower than where you would be on the fixed-rate mortgage. Remember that more interest is paid at the beginning of the loan that at any other point, and your monthly payment will most likely stay lower than your fixed-rate payment.
2. My rate will definitely go up.
This is not true. While rates can go up, rates also go down as well. This is shown throughout history to be the case. The VA loan program calculates its interest rates based on the CMT index, which is calculated on an annual basis. From 2001-2011, the CMT index went down for seven out of the ten years, and continued to go down in subsequent years. As of the writing of this article, the CMT index is currently at .1%, which is incredibly low. In all of U.S. history, only once has the index increased a full percentage point for more than two years in a row. So it is certainly possible that your interest rate will go up, but it is also very possible that it will go down.
The VA has put numerous protections in place on the hybrid ARM program to keep it a good deal for eligible VA borrowers. Even if your rate does go up, it cannot go up more than 1% each year, and it is extremely unlikely (as in it has happened once in the history of the United States) that the rate will go up a full percentage point for two years or more. The VA also places a limit on hybrid ARM rates, so that they can never be more than five percentage points higher than what they started at.
As a tip on how valuable a lower interest rate is, remember that interest is nothing but poison. Paying interest is exactly like throwing money out the window or lighting it on fire rather than using it. Any interest you pay is lost money that you worked hard for and earned and got nothing from it. There are two types of people in this world – people who pay interest and people who collect it – and guess which group is wealthier. Obviously, creditors have a right to charge interest, since that’s how they get paid for their services. Creditors allow you to have something now, instead of having to save for it and get it later. For that privilege, they charge interest, and that’s how they make money, and there’s nothing unethical or wrong about that. For you the borrower, however, you need to remember that every dime you pay in interest is a dime more than you had to pay. Do everything in your power to only pay interest when there is no avoiding it, and to choose the option that brings less interest, and you’ll be shocked at how much money you save.
For further reading beyond myths, check out our article comparing the pros and cons on the VA Hybrid Loan.