VA Hybrid Arm Loans For Veterans.
In recent years the VA hybrid Arm mortgage for military Veterans has gained more and more popularity due to its amazing benefits.
The VA hybrid Arm is generally fixed for either 3 or 5 years. The two most popular VA Arm loans are the 3-1 hybrid and the 5-1 hybrid and it is important to understand just what that means.
3-1 means the VA loan is fixed for 3 years and then can go up 1 time a year and never more than 1% each year. The 5-1 means then that the interest rate is fixed for 5 years and then can go up 1 time a year and never more than 1% per year. The 1% a year maximum increase or decrease is referred to as the annual cap.
In addition to an annual cap, these 2 VA hybrid Arm loans also have a life time cap of 5%. That is correct, the VA hybrid loan cannot go up more than 5% higher than the initial rate given to you when you get the loan.
How is my VA hybrid Arm rate determined?
The Department of Veteran's Affairs does not set your rate, however VA approved lenders and mortgage banks do. When you get your VA hybrid loan you will be given a start rate or an initial rate. Just like any other mortgage rate, this rate is determined by the state of the economy, what lender you work with, and how you decide to set your loan up. In general, the VA hybrid rate should be about 1%-1.5% lower than the 30 yr fixed rate being offered.
During the 3 or 5 years that your rate is in the FIXED stage, you will stay right at that start rate you were given, once the loan is ready to adjust, that is when your rate can go up or down depending on the overall state of the market and the interest rates banks are offering.
What is the index?
The index for a VA hybrid is the CMT or Constant Maturity Treasury. The purpose of this site is to keep things simple and easy to understand so in layman's terms know that this is a very stable and safe index that because it is an average over a 12 month time line, does not allow for rapid increases or decreases in rates. Most indexed not averaged and not tied to the US treasury are unsafe and much more volatile. The index is important because it is the starting point that determines how high or low your interest rate will be in the future.
What is the margin?
Simply put, the margin is the "padding" or "cushion" between the index and the actual rate the bank wants to charge. The larger the margin, the more money the bank can make. You should look for low margins when finding the right loan. Perhaps you have heard something like, "Bill Gates makes billions because of the margins he makes on software?" This is true, he make software cheaply and marks it way up and he makes lots of money. The VA hybrid loan has very low or small margins so this is better for you, the home owner.
Example of how the VA hybrid rate will and can adjust:
Suppose your start rate is 3.5%. The margin is 1.75% and the index is .75%. Here is what will happen when the loan adjusts. Index + Margin = your actual or fully indexed interest rate.
.75 + 1.75 = 2.5% There are many cases where someone saw their rate go down at the end of year 3 or 5 and the example above shows just that. Now imagine that rates have been rising during the 5 years your VA hybrid mortgage was fixed and the index is now at 3.25%. 3.25 + 1.75 = 5%. Remember however that you started at 3.5% so the maximum you can now go to even though it should be 5% is actually 4.5%
