Is the VA 3-1 ARM loan the right choice for you? You might already know the difference between various types of ARM and hybrid loans. You know that the ratios of an ARM indicate when rates adjust and for how long they stay fixed (like how a 5-1 ARM will have fixed rates for five years then change every year after that). But what makes one loan preferable to another? Does it really matter if you take out a loan that is stable for five years or seven or three before it becomes adjustable? Yes, it does, and figuring out which ratio to choose takes not only a lot of calculating, but also a lot of planning.
How long a person stays in their house before moving factors largely into the decision of which hybrid ARM ratio he or she needs. When a borrower is likely to stay in his or her house for 7 years, the 7-1 ARM might be best, because rates won’t change at all through those 7 years. However, a lot of people get stuck in the trap of thinking fixed rates are always better than adjustable, and this just isn’t true. If the starting rate is unfavorably high, you really don’t want to be stuck with it for almost a full decade with the 7-1. For this scenario, and with quick house moves, a smaller fixed period might be more beneficial. The 3-1 ARM allows just enough time for rates to drop again to something more favorable. And when they do, you can take advantage of that, unlike a fixed-rate mortgage. Your own interest rate will adjust along with the chosen index, and it will also re-amortize based on what you’ve already paid.
VA 3-1 Hybrid and Planning for the Future
When you think you’ve figured out which adjustable-rate mortgage is best, you can’t stop there. You have to plan for the future. Planning this early on also helps you identify the right loan. Anticipate where your personal finances will take you in the next 10 and even 30 years if you can. Sure, it’s almost impossible to plan that far ahead. But, most ARM loans have lives of 30 years and knowing if you’ll even have your loan that long can be very helpful.
Stick to planning out the next decade if 30 years is a little too unrealistic. Let’s say you’ve tentatively chosen the 3/1 ARM. You want to plan out your finances to ensure you can pay the fixed rate set in the contract for the next 3 years and calculate whether you can afford to cover the remaining years’ fluctuating payments. For VA loans, you don’t have to anticipate anything more than a 1 percent increase each year and no more than a total 5 percent increase over the entire life of the loan, because those are the limits the VA has set. Taking those factors into consideration, make a plan. Budget so that you know where your money will be going in the next ten years. Also incorporate added expenses or payments like car and student debt. You will never regret being prepared for the future, and when it comes to mortgage loans, not doing this will be detrimental.
ARMs, Hybrid ARMs, and Fixed-Rate Mortgages
Don’t forget that there are other options. If the VA 3-1 ARM is messing with your future, put it aside. There are plenty other adjustable-rate mortgages to choose from that might cater better to your needs. If you want to abandon the adjustable-rates idea altogether, investigate a fixed rate. When it comes to your mortgages, don’t give in to any plan just because you’re tired of crunching numbers. If you have done your research but can’t settle on a solution, talk to a loan officer. Or even if you have settled on something, talking to a professional will give you the individualized facts you need.