The current economic downturn has put many homeowners in financial hardship. With many people being financially strapped, a good question to ask is whether or not the VA Hybrid loan is a good option for saving money.
A VA hybrid ARM is a combination of an adjustable rate mortgage (ARM) and a fixed rate mortgage. The introductory rate period is fixed, usually for 3, 5, 7, or 10 years of the loan. Generally, the shorter the fixed rate period is chosen, the lower the rate. After the introductory period is over the adjustable rate begins. After this period, the rate can only adjust every 12 months and there are adjustment rate caps that protect the borrower from the rate jumping too high right off the bat. There are also lifetime caps of 5% so that the loan will never exceed their fixed rate plus 5%.
Many veterans might be uncertain about this type of loan because of what may happen with interest rates in the future. While it is good to be cautious, present financial issues may be more important than future costs. This loan allows for monthly savings right now, which could allow for savings later as well. There are pros and cons to every loan option. Borrowers must look at each side and decide which the right alternative is for them and their current situation.
There are a few disadvantages that need to be kept in mind. If the interest rates skyrocket after the introductory period, the borrower could end up paying a considerably larger interest rate over the term of the loan. On the other hand, if the borrower chooses a long fixed rate period and the market’s interest rates lower, then they will end up stuck in their high fixed rate. It can go both ways. The borrower has to accept the interest rate risk after the fixed rate period.
However, there are definitely some advantages to the hybrid ARM! First of all the borrower will get a guaranteed fixed rate for the first 3 to 5 years, or however long they opt for. Then after that the rate can only adjust every 12 months, and keep in mind that the rate can go down during this time as well! Many homeowners may choose this option for a loan because it hardly makes sense to pay a fixed rate for thirty years when they will mostly likely be out of their homes and loans before then anyway. If the borrower is looking for a jumbo loan, an ARM is probably the best choice for them. It will offer them substantial savings over a thirty-year loan because the rates are normally quite a bit higher while jumbo hybrid ARM rates are generally much lower.
VA Hybrid ARMs offer safety and savings that seem to be too hard to pass up. Yet, borrowers still need to decide if they need to weigh their options and decide which loan option is the best for them.