The Advantages of a VA Hybrid ARM
This article is mostly taken from our VA Hybrid ARM Guide from our website. For more information on Va Hybrid ARMs, please check out the full guide.
The first and most obvious advantage is getting a lower starting interest rate than on a fixed-rate mortgage. A Hybrid ARM finds a fantastic middle-ground between fixed-rate and adjustable-rate mortgages. Fixed-rate mortgages can be frustrating if interest rates fall after you’ve gotten your loan, and adjustable-rate mortgages can be risky if interest rates rise significantly over the life of the loan. In a Hybrid ARM, you and the lender both get the potential benefit of having your interest rate adjust with time, but you also have two assurances to mitigate your risk: your rate is only adjustable after the first 3 years or the first 5 years, and it can adjust by no more than 1% per year. This offers an amazing amount of benefits to you as the borrower. Consider the following example:
You purchase a home using a 5-year Hybrid ARM, which means that your interest rate will be fixed for the first 5 years of the mortgage, after which it will adjust annually no more than 1% in either direction and a lifetime cap of 5%. No matter whether interest rates got lower or higher during the first 5 years, you’re in a great position. If interest rates got lower, your interest rate will automatically begin adjusting accordingly, without you having to go through the time, trouble, and a fair amount of money to get a refinance. If interest rates got higher, your loan may still take years to catch up to the current rate, and if the rise was dramatic enough (more than an additional 5%), your loan may always stay lower than what you could get if you refinanced. In other words, no matter what your plans for the home you are buying are, getting a VA Hybrid ARM instead of a fixed-rate or a regular ARM can save you money.
Being quite honest, despite some myths, VA Hybrid ARMs are advantageous in almost every situation, but there are some situations that get even more benefit out of the Hybrid ARM than others. For example, if you are not intending to live in your home longer than 5 years, you get an enormous amount of value in a Hybrid ARM because you get a lower interest rate than you could in a fixed-rate mortgage, and you never have to worry about it adjusting because you’ll be selling before it does. Hybrid ARMs also offer a more significant benefit if you expect to be able to make more than the minimum payment for the first few years of the loan term, but not necessarily after (e.g. your children will be college-age in about 5 years and at that time you will likely need to divert more money to helping them through college). Since the rate stays fixed and relatively low for the first 5 years, you can knock the principal down each month ahead of the amortization schedule, so even if the rate gets higher after the initial term, your monthly payment doesn’t get as much higher, if it increases at all.
Lastly, if you are expecting to live in your home until it is completely paid off, a VA Hybrid ARM can save you tens of thousands of dollars over the life of the loan. How? Consider the following example:
You buy a house intending to grow old in it. By choosing a Hybrid ARM, you get the benefits of a refinance (a lower interest rate if rates have gone down) without the cost (thousands of dollars in closing costs). Unless you’re looking to get cash-out to consolidate debt, there is no need to refinance a Hybrid ARM, because it adjusts annually towards the current interest rate. In addition to the thousands of dollars saved due to not needing to refinance, you are also enjoying a lower interest rate than you could have gotten with a fixed-rate mortgage (especially during the initial 3 or 5-year term, where you pay more interest per month than any other time during the loan), which can save you thousands of dollars more over the life of the loan. How much money can you save? Let’s say you buy a $200,000 home at an interest rate of 4.0%. How much money do you save compared to a $200,000 home at 4.5%? Roughly $20,000 of interest over 30 years. Imagine how much money a difference of an entire percent or more could save you.