VA vs. Conventional: Available Loan Options
Continuing our theme of establishing the superiority of the VA loan program to the conventional loan program, we are going to compare the two programs based on one very important metric: available loan options within each program. This is a factor that many borrowers do not even take into consideration when getting a loan, even though a variety of loan options can make a huge difference in how much money you save or spend over the life of the loan, or how easily you can refinance or move when the time comes. Let’s talk about some loan options that matter and what the two programs offer in each regard.
A Streamline Refinance Option
A streamline refinance is a fast, cheap, and easy way to refinance your loan. The primary features of a streamline refinance are that an appraisal may not be required, the credit check and paperwork is minimal and usually the borrower cannot get cash out on the equity in their home when using a streamline. Now let’s talk about each loan program. There’s no such thing as a standard “conventional streamline refinance”. However, many banks offer their own streamline refinance options to borrowers. These offerings vary greatly in just how ‘streamlined’ they really are and how expensive they are to the borrower. Generally speaking, though, streamline refinances offered by banks satisfactorily meet the goals and purposes of a streamline refinance.
The VA loan program has a standard streamline refinance option called the IRRRL (Interest Rate Reduction Refinance Loan), which is actually really really cool. The VA has made it really advantageous for borrowers to have access to the IRRRL. The credit check is minimal, an appraisal is usually not required, and the borrower can even get up to $6,000 to make energy-efficient improvements to their home with an EEM. The Funding Fee is significantly cheaper on an IRRRL than on a normal refinance, and an IRRRL can close in as little as 10 days. The IRRRL can be much faster, cheaper, and easier than a streamline offered by a bank for a conventional loan, not to mention more consistent.
An Adjustable-Rate Mortgage Option
An adjustable-rate mortgage (ARM) is the opposite of a fixed-rate; the interest rate adjusts over the life of the loan instead of remaining the same. ARM loans can save you a ton of money over a fixed-rate depending on the circumstances, but they can also cost you more. A lot of the effectiveness of an ARM depends on the terms offered you. Conventional ARMs come with an initial fixed-rate period of usually 3, 5, or 7 years, but can go as low as 1 or as high as 10. After the fixed period, however, the interest rate can adjust as far as it needs to to catch up with the market, up to 5% higher than the starting rate. After that, the rate adjusts annually with an annual cap of 2% difference each year. The lifetime cap on the interest rate on an ARM is 5% higher than the starting rate (hence the limit on the first adjustment).
VA ARMs are much, much better. Not only does the VA hybrid ARM offer much lower starting rates, the annual adjustments (including the first one) are limited to 1% each year, with the same lifetime cap of 5%. The VA hybrid ARM is also based off of a different index than the conventional ARM. The VA’s index is the 1-year CMT, which is much less volatile than the LIBOR used by conventional ARMs. The CMT is averaged for the last twelve months, making your interest rate adjustments very predictable, and the 1% annual cap protects you from rapid upswings in the market. It’s much more likely to save money (usually a lot of money) by using a VA hybrid ARM instead of a fixed-rate. It’s not nearly as safe of a bet to use a conventional ARM instead of a fixed-rate.
When it comes to loan options, the VA definitely has this one in the bag. We’ve also written articles comparing loan qualifying on each program and interest rates available on each program, and we’ll keep writing articles comparing the two so you can have a very clear and detailed picture on which loan option is going to be best for you.