The VA guarantees a variety of home loans. There are two basic types of loans with two additional options that are appealing to servicemembers with special financial goals:
This is the loan that most people think of when considering a mortgage. The interest rate never changes, and the monthly payment will remain the same over the life of a loan. Fixed rate loans are usually for 15 or 30 years.
Tip: Get a fixed-rate mortgage if stability is important or if you have less confidence about the economy or job security.
Adjustable Rate Mortgage
An Adjustable Rate Mortgage is a fluid loan where the interest rate changes with fluctuations in the market. The first-year rate (otherwise known as the teaser rate) is generally a couple of percentage points below the market rate. The “cap” is the upper limit of the interest rate. If a teaser rate is 4%, and there is a five-point cap, then the highest that an interest rate could go would be 9%. The amount that the interest rate can rise each year is usually limited to one or two percentage points per year, but the frequency at which the rate adjusts can vary. If interest rates go up, an ARM will adjust accordingly.
Tip: Get an ARM if you expect to stay in a house for less than five years.
VA Hybrid Adjustable Rate Mortgage Loan
This loan is fixed for period of 3 or 5 years, and then adjusts annually thereafter. It allows a 1% annual interest rate adjustment after the initial fixed interest rate period, and a 5% interest rate cap over the life of the loan. Interest rate adjustments must occur on an annual basis, except for the first adjustment, which may occur no sooner than 36 months from the date of the borrower’s first mortgage payment on the 3/1 ARM or 60 months for a 5/1 ARM. The loan term is 30 years for either of these loans. Some short-term homebuyers like this option because of the lower rates in the early years.
Graduated Payment and Growing Equity Mortgage
Both of these loans start with a low initial monthly payment and gradually increase. A GPM begins to increase in the sixth year of the loan while a GEM will gradually increase payments directly into the principal of the loan resulting in an early loan payoff.
Mortgage Option Pros and Cons
There are really just two main loan categories — fixed and variable-rate. A variable-rate agreement, as distinguished from a fixed-rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary. Here are some of these pros and cons for these two main types:
|Fixed-Rate Mortgage||Adjustable-Rate Mortgage|
|Pro: Homebuyers can determine exactly how much they will pay each month for the next 30 years.||Pro: Because interest rates are lower for an ARM, it’s easier to borrow more. This can help first-time homebuyers afford more home.|
|Con: Buyers pay a premium for predictability as an FRM will generally cost more than a ARM over the life a 15 to 30 year home loan.||Con: Rising interest rates can create financial hardship if the new monthly mortgage payment rises beyond the owner’s budget.|