What Kind of VA Hybrid ARMs Are There?
VA Hybrid ARMs come in several flavors. It’s hard to simply list what kinds of hybrid ARMs are out there, because there’s more than one set of options to choose from. You can choose how long the note rate lasts, you can choose what note rate you want to start with and thus what margin you’ll be offered after the fixed period expires, and you can choose how you want to use your hybrid ARM to work best for your goals. First, we’ll cover the differences between the note rate terms, then talk about how the note rate and margin work together, and then we’ll cover different ways you can use your hybrid ARM to make it the most appropriate for your future plans.
First, you can choose between a 3/1 hybrid ARM and a 5/1 hybrid ARM. What am I talking about? Well, the first number (either 3 or 5) is the number of years that your interest rate remains fixed. The second number (“1” in both cases), indicates the maximum amount that the interest rate can be adjusted each year following the fixed period. So for a 3/1 hybrid ARM, the initial interest rate will remain fixed for 36 months, then will adjust by no more than 1% each year, while a 5/1 hybrid ARM will remain fixed for 60 months, then adjust by no more than 1% each year. Which one you choose depends on a number of factors, not least of which is how long you intend to remain in the house. You are able to refinance at any time, and since the IRRRL allows you to roll closing costs into the loan amount, you can really do an IRRRL anytime you want to. Remember though, that the lender may likely offer you a better starting interest rate and margin on a 3/1 hybrid ARM than a 5/1. You’ll want to speak with the VA-approved lender you’re planning on working with to find out.
Next, once you’ve chosen whether to go with a 3/1 or 5/1, you will likely be presented with at least two options on what you want your starting note rate to be. The note rate is the fixed interest rate used during the initial period of the loan. You may think that you definitely want to choose the lower option, but that may not be the case. Often, lenders offer a lower margin (one component of how the interest rate is calculated after the fixed period) in exchange for a higher note rate. For example, on a 3/1 hybrid ARM, Low VA Rates offers to note rate options: a 2.25% and a 1.75%. The margin paired with the higher note rate is 2%, while the margin paired with the lower note rate is 2.25%. Which one ends up saving you the most money? It’s a numbers game, and any of our loan officers would be more than happy to work it out with you to decide which is likely to be your best option.
As far as the “official” options that you can choose from, that about covers it. However, you have a lot of options in how you handle your hybrid ARM once you have it. Are you planning on selling your home and moving in the next 5-7 years? Not selling but hoping to refinance soon? Hoping to keep the loan and not need to move or refinance until the loan is paid off and the home is yours? Depending on your answers to those questions, you can decide if you want to use the money you save each month (from having a smaller mortgage payment) to pay off extra principal on the house, improve the house, or spend it on something else. If you’re planning on selling the house, you may want to put that money towards improving the home to increase its sale value. You can also pay off principal faster to save yourself interest in the short run, but putting the extra money towards principal gets much more beneficial after about 7-8 years, since that’s when it starts to take a noticeable chunk out of how much interest you’re being charged. Perhaps, if you’re only planning on being on the home for a few years, you just want to take advantage of the lower monthly payments and have $200 more fun-money each month. It’s all up to you.