What is the VA Hybrid Loan?
Before we delve into the details of how the VA hybrid loan works, it helps to get familiar with this basic overview: the VA hybrid offers fixed rates for a period of time before transitioning into adjustable rates for the remainder of the loan life. It features helpful ARM caps that protect borrowers from financial shock in worst-case scenarios, and it also has many other benefits that the VA offers in most military home loans. Many homeowners get nervous just thinking about adjustable-rate loans because of the questionable stability. In all actuality, there are many benefits to both the fixed-rate mortgage and ARM. Choosing the fixed option just because it sounds more reliable isn’t necessarily the best reason, and doing this could end up costing you, especially if you find yourself stuck with a high rate for the life of the loan while market rates are dropping around you. Some prospective homeowners may be torn between the two options, but with the VA hybrid loan, this decision becomes a lot easier since you get the best of both worlds. Find out if this option is best for you.
The fixed period starts off each hybrid loan, but the amount of time varies depending on which type you get. Rates can stay fixed for 3, 5, 7, and even 10 years. During this time, your interest cannot increase or decrease. This period of stability allows you to get comfortable paying that new mortgage each month, and a great feature of the hybrid is that rates are going to start off much lower here than with a full fixed-rate loan (it tends to be at the lowest with the 3-year choice). As a result, you’re going to end up paying a lot more into equity at the start of the loan with this than with a fixed.
After the fixed period is over, the adjustable period will start, and it only finishes when the loan itself ends. During this time, interest rates will adjust every year, but they can only adjust once each year, and they cannot increase more than 1 percent each time or more than 5 percent over the entire loan life. These are the caps mentioned earlier. These caps are actually put in place by the VA, so you can be sure that the VA hybrid ARM will be far safer and more stable than any other hybrid option out there.
Each time the interest rates change, the payments will recalculate based on what is left to pay. This is called re-amortization. That means the interest and principal that make up your payment would balance out a lot faster than with a fixed mortgage loan. To see a full video presentation on the VA hybrid loan scroll down the bottom half of this page.
Refinancing with the VA Hybrid Loan
You can refinance into or out of a VA hybrid loan pretty easily if your current rates and terms aren’t working out for you and your situation. This can be particularly helpful if your situation changes drastically around the end of the fixed-rate period because it means you can get out of having adjustable rates before they begin.
Why would you want to refinance into a hybrid ARM? If you plan on staying in your current house for another 5 years, think about getting a 5/1 hybrid. You would benefit from the much lower rate during that time but then get out of the loan before risking an increase.
Plan ahead. Think about where your finances will be in regards to the market to better determine which loan option will benefit you most. Talking to one of our loan officers will also help the process since they work with all situations every day.