A VA hybrid adjustable mortgage, or VA hybrid ARM, is a mortgage loan with an interest rate that is fixed, which means the loan amount stays consistent, after an initial period and then acts adjusts annually after the initial fixed period, like an adjustable rate mortgage, or an ARM. An adjustable rate mortgage is a loan where the interest rate adjusts based on indexes or prime rates. Lender often set a cap for how high the interest rate can reach annually. Hybrid ARM loans hybrids together both a fixed rate and an adjustable rate mortgage. Also unlike an ARM, VA Hybrid ARM adjust only once a year and are tied to a financial index that averages rate changes over a twelve month period so as not to subject the borrower to wild payment swings, except for the first adjustment which may occur no sooner than 36 months from the date of the borrower’s first mortgage payment on 3/1 ARM or 60 months from the date of the borrower’s first payment on the 5/1 ARM. The cap on the interest rate is 5% for VA hybrid AMR.
There are several different terms for a hybrid ARM. Hybrid ARM term is referred to first by the fixed amount rate and then the adjustable amount rate periods. For example, hybrid ARM 3/1 is a fixed mortgage rate for 3 years and an adjustable rate for 1 year. The date the fixed rate switched to the adjustable rate is known as a reset date. A Hybrid ARM transfers some interest rate risk from the lender to the borrower allowing for lower interest rates. The usual Hybrid ARM rates are 3/1, three years fixed rate and 5/1, with a five-year fixed rate. These rates are usually 30-year programs.
There are many advantages to a VA hybrid loans. Here are the top three reasons:
- VA Hybrids are the best of both worlds, getting a fixed rate at first but then later having more flexibility with the adjustable rate. If you cannot decided which kind of loan to get, get both! Hybrids are great if you feel that rates will be lower in next couple of years, since you have a fixed rate at first when rates that is usually 1-2% lower than a fixed rate and then the loan amount will adjust to a possible lower rate. Since there is a cap in place from the lender, the rates during the adjustable period will not be higher than 1%. Also, if you know that you will be making more money in the next couple of years, like if a borrower is in school, a hybrid in another great option.
- VA Hybrids are particularly great if a borrower will not be staying in their home long. Since you can get the lower interest rate for hybrids, a borrower can buy a home at a lower interest rate with a hybrid and then sell it before the rate becomes adjustable. The VA hybrid loan typically an initial start rate of 1-% lower than the going 30 year fixed rate. This can amount to an extra $100 to $200 a month in savings and if you will not be in your home long, you will never have to worry about rates fluctuating.
- VA Interest rates are also lower for an ARM, so it is easier to borrower more. This can help first-time homebuyers afford a larger home.
There are many great benefits that come from having a hybrid VA loan and this option should be looked at by anyone wanting to purchase or refinance their home.