The Mortgage for the Frequent Mover – the VA Hybrid ARM
Home-ownership is a fundamental step in building your wealth. Not only that, home-ownership means freedom to customize and adapt your dwelling to however you want it to be. Owning a home offers a far higher level of freedom than renting. But as we all know, with great power freedom comes great responsibility – owning a home also means paying property taxes, maintaining homeowners insurance, and paying interest on your mortgage. It also means replacing expensive appliances and utilities when they break down and being the one who has to deal with it when a group of teenagers drives off the road, crashes into your fence, then hightails it before you can get the license plate. Not only that, but buying a house is really expensive; your lender takes their cut, the title company takes theirs, and even the VA takes a cut if you’re doing a VA loan. So why on earth would anyone buy a house if they were only going to live there for a few years?
You may be asking yourself this question if you’re still on active-duty, or are just the kind of person that likes a change of scenery every few years. You’ve probably decided that it’s not worth penny-pinching for three years just to pay closing costs for the next time you move. Renting is just a better option – not only for the lack of headaches, but also because it’s the best financial decision over the long term…or is it? If you’ve decided that renting is the best option for you, it’s probably because you don’t know as much about the VA loan Hybrid ARM as you should.
The VA loan hybrid ARM solves pretty much every problem that there is with buying a house for only a few years. Closing costs are much more affordable than for a fixed-rate mortgage and interest rates are much lower. You are also able to roll the VA funding fee into the loan amount rather than paying it upfront. So how does a hybrid ARM work? It’s pretty simple; it starts out as a fixed interest rate for either the first 3 years or the first 5 years. After that initial period, the interest rate adjusts once per year based on the CMT (an extremely docile index), and can never adjust more than 1% per year, and can never get more than 5% higher than what it started from in the fixed period.
So what did I just say? Here it is again:
- lower closing costs
- lower interest rate
- roll VA funding fee into loan
- extremely low, fixed rate for first 3-5 years
- rate adjustments are based on CMT
- can never adjust more than 1% per year
- can never go higher than 5% above starting rate.
So whether your PCS orders come in 1 year or 5 years, you’re pretty much guaranteed to be better off with a hybrid ARM than either buying with a fixed-rate or just renting. As of the writing of this article, LowVARates is offering ARM rates starting at around 2% for the initial fixed period. In case you don’t know, that’s about half what conventional borrowers are getting on a 30-year fixed. So let’s assume you get a 3/1 hybrid ARM (initial fixed period is 3 years) and opt for the 2.25% interest rate (comes with a lower margin after the fixed period than lower initial rate options), and your PCS orders (or your decision to move) don’t come until 5 years later. Even in a worst case scenario, your interest rate can only get as high as 4.25% before you move, which means you’ll have paid off a bunch of principal on the home and have equity (barring another recession) on the home by the time you move. Would you rather throw money away on rent or convert money into equity in your home then back into cash when you move? This is why we consider the VA hybrid ARM ideal for borrowers who are planning on moving in the next few years.