VA Hybrid Program
VA Hybrid Program
Explore the potential advantages of a VA Hybrid Adjustable-Rate Mortgage and learn how 3/1 and 5/1 VA Hybrid loans work.
A VA Hybrid ARM combines an initial fixed-rate period with an adjustable-rate period later in the loan. For some Veterans, the potential for a lower introductory rate can provide additional flexibility during the first several years of homeownership.
Why Choose a VA Hybrid Loan Over a 30-Year Fixed?
Monthly Savings
A VA Hybrid loan may offer a lower initial interest rate than a comparable fixed-rate mortgage. A lower rate can reduce the initial monthly principal and interest payment and leave more room in your monthly budget.
Ability to Pay Off Other Debts
If the Hybrid loan provides a lower initial monthly payment, the difference may give you additional flexibility to reduce other financial obligations or work toward other financial goals.
Opportunity to Put More Toward Principal
Borrowers who choose to apply monthly savings toward mortgage principal may reduce their outstanding balance more quickly. Additional principal payments can also reduce the amount of interest paid over time.
Predictable Initial Fixed Period
A 3/1 VA Hybrid generally provides an initial three-year fixed-rate period, while a 5/1 VA Hybrid provides an initial five-year fixed-rate period. During that initial period, the interest rate does not adjust.
Potentially Faster Recoup Period
A lower introductory rate may allow borrowers to begin realizing monthly payment savings sooner. Actual savings depend on the interest rate, loan amount, closing costs, how long the loan is kept, and other loan terms.
Program Flexibility
After the initial fixed period ends, the interest rate can increase, decrease, or remain unchanged according to the applicable index, margin, and adjustment limitations contained in the loan documents.
How a VA Hybrid ARM Works
The first number identifies the initial fixed-rate period. The second number indicates how frequently the interest rate can adjust after that fixed period.
For example, a 3/1 loan has an initial three-year fixed period and can then adjust annually. A 5/1 loan has an initial five-year fixed period and can then adjust annually.
VA ARM adjustments are tied to an approved interest-rate index and the margin stated in the loan documents.
The 3/1 VA Hybrid provides a fixed interest rate for the first three years. After the initial fixed period, the interest rate may adjust annually.
- Fixed Period: The initial interest rate is fixed for three years.
- Adjustment Period: After the fixed period, the rate may adjust once each year.
- Initial Adjustment Cap: The first adjustment is generally limited to a maximum change of one percentage point.
- Lifetime Increase Cap: The interest rate generally may not increase more than five percentage points above the initial contract rate.
If the initial rate were 2.25%, a one-percentage-point first adjustment cap would limit the first adjusted rate to no more than 3.25%, subject to the applicable index, margin, loan documents, and VA requirements.
The 5/1 VA Hybrid provides a fixed interest rate for the first five years. After the initial fixed period, the interest rate may adjust annually.
- Fixed Period: The initial interest rate is fixed for five years.
- Adjustment Period: After the fixed period, the rate may adjust once each year.
- Initial Adjustment Cap: For VA Hybrid ARMs with an initial fixed period of five years or more, the initial adjustment may be limited to as much as two percentage points.
- Lifetime Increase Cap: For these loans, the maximum lifetime increase may be as much as six percentage points above the initial contract rate.
The exact index, margin, periodic adjustment limits, and lifetime cap for a particular loan should always be confirmed in the loan disclosures and mortgage documents.
What Happens After the Fixed Period?
After the initial fixed-rate period, the interest rate is recalculated according to the loan's specified index and margin, subject to the applicable adjustment caps.
- The rate may increase, decrease, or remain unchanged.
- The new rate affects the monthly principal and interest payment.
- Borrowers receive required disclosures regarding upcoming payment and interest-rate adjustments.
- The rate cannot exceed the applicable adjustment and lifetime limits contained in the loan terms.
Is a VA Hybrid Loan Right for You?
We can help you compare a VA Hybrid ARM with available fixed-rate VA options so you can understand the payment structure, adjustment terms, and potential costs before choosing a loan.
Call 801-871-3739