What’s A VA Adjustable-Rate Mortgage Loan?

Department of Veterans Affairs (VA) loans are one of the few options that offer the opportunity to buy or refinance a home with a 0% down payment or equity amount. It’s a great benefit for eligible active-duty service members, qualifying reservists, veterans or those who the VA classifies as a surviving spouse. You can get a fixed rate for a VA loan, but adjustable-rate mortgages are attractive for a number of reasons.

What Is A VA Adjustable-Rate Mortgage?

VA ARMs are hybrid ARMs. This type of home loan has a fixed rate for a number of years before adjusting. The rate then typically adjusts once per year. Rocket Mortgage^® offers 5/1 ARMs for VA loans. This means the rate stays fixed for 5 years before adjusting once per year based on an index every year after that. ARMs have 30-year term lengths.

How Do VA ARM Loans Work?

Different lenders may offer different types of VA loans, but to give you a general idea of how an ARM loan works, we’ll be going over the 5/1 ARM that we offer.

In a 5/1 ARM, the 5 refers to the number of years that the rate stays fixed at the beginning of the loan. So in this case, rates stay fixed for 5 years. The 1 means the rate adjusts once per year once the fixed time frame is up.

Some lenders may offer 7/1 ARMs and 10/1 ARMs, which have a fixed period of 7 and 10 years, respectively. Longer fixed periods could be more ideal for home buyers who prefer more time to figure out their next steps before their rate could increase.

VA ARM Rates

All VA ARMs are tied to an index called the constant maturity treasury. On the day of your adjustment, this number is added to a margin to come up with your new interest rate on which your payment will be based going forward until the next adjustment.

Each time your payment adjusts, your loan is reamortized. This means your payment is recalculated based on the new VA loan rate and the number of years remaining in your loan term. So, assuming a 30-year loan, your new loan payment at the first adjustment would be based on the 25 years remaining on your term.

VA ARM Rate Caps

There are also caps on how much your rate can adjust up or down each year. A common cap structure for VA loans is written 1/1/5. This means the first time your rate adjusts up or down, it can do so by a maximum of 1%. For each subsequent adjustment, it can go up or down by only 1%. Finally, the rate can go up or down a total of only 5% throughout the loan.

Refinancing A VA ARM Loan

Pros And Cons Of VA ARM Loans

Pros

The benefits of VA ARM loans are the same as those you’d find with all ARM loans.

• Suitable for starter homes: Let’s say you know a home is just a starter home for you. You can benefit from the lower fixed interest rate at the beginning of an ARM loan and then move to a new place before the rate adjusts.
• Low initial fixed rate: The lower fixed rate at the beginning of the loan could enable you to pay more toward the principal so you have a lower balance to pay interest on by the time of your rate adjustment.
• Caps on interest rate increases: The interest rate on a VA ARM can go up only a certain amount per year and a certain amount over the life of the loan. It doesn’t go up indefinitely, even in the worst interest rate environment.

Cons

As with the benefits, the drawbacks are similar to any ARM offerings.

• Unpredictable monthly payments: Compared with a fixed-rate mortgage, you won’t have the same level of confidence about what your payment is going to be from year to year. It could go down, but you also risk higher rates and payments.
• Caps on interest rate decreases: Although the caps limit how much your payment can go up, along with the margin itself, they also restrict how much your payment can go down. This only matters in markets where interest rates are extremely volatile and a sudden drop makes interest rates much lower.

How To Calculate Your VA Loan ARM Payments

In order to calculate your initial VA ARM payment, you’ll need to know your initial rates and your initial balance along with the length of your term. This may even be the purchase price of the home, because no down payment is required on VA loans. It may also be slightly higher than the purchase price if required closing costs like the VA funding fee were built into the loan.

Once you have your initial term length, balance and starting interest rate, you can calculate your payment using our amortization calculator. You can also do this at each subsequent rate adjustment. You just need to know the new interest rate, your remaining balance and the number of years left on your mortgage term.

If you want to plan so you don’t overextend yourself, calculate what your payment would be if the rate rose to the lifetime cap on your loan.

How To Apply For VA ARM Mortgage Loans

Many lenders, including Rocket Mortgage, offer VA ARM loans. In order to apply, be ready to share information about your income and assets and meet credit score requirements for VA loans. The VA itself has no minimum credit requirement, but most lenders do. Rocket Mortgage has a minimum credit requirement of 580.

Lender Requirements For VA ARMs

Based on factors like your credit score and the size of the down payment (if any), your lender will qualify you for an interest rate. You’ll be qualified using the rate listed on your mortgage note. This helps determine how much you might be able to afford. Your rate will also be determined by information in documents needed to apply for a mortgage and other factors lenders may consider before applying, including (but not limited to):

• Debt-to-income ratio (DTI)
• Employment history
• Loan-to-value (LTV)
• Certificate of Eligibility (COE)
• Property type

The Bottom Line

VA ARMs are similar to other adjustable-rate mortgages in terms of their attributes, pros and cons. One major upside is the lower initial fixed rate because you could move before the rate increases. The downsides are that you have less certainty of what your payment is going to be year-to-year and the limits to how much your rate could fall.

If you think a VA ARM sounds like a good option for you, you can start an application online or give us a call at (833) 326-6018.