In case you’re not aware, there are several types of VA Loan repayment options you can choose from. If you’re considering applying for a VA Loan, now is the best time to understand and review your options. Currently, you can opt into one of three basic repayment options:
Traditional Fixed Rate
As the name implies, the interest rates of this repayment plan are fixed until the borrower has fully paid their loan. This means that regardless of what happens to the economy, interest rates and the principal will not be affected – rates are already locked in. This repayment scheme is ideal for borrowers who have a low-risk tolerance and also for homeowners who prefer to pay a fixed amount monthly. Note that traditional fixed rates can be changed by refinancing your loan.
Traditional Adjustable Rate Mortgage (ARM)
Compared to fixed-rate plans, adjustable rate mortgages, also known as ARMs, are riskier. But, as they say, the higher the risk, the higher the potential reward – and the same applies to most VA loans. As with most ARMs, interest rates are significantly lower than fixed-rate mortgages, but the prices are adjusted every year.
Note that Annual interest rate adjustments for traditional ARMs can’t exceed 1%, and increases can’t exceed 5% over the life of the loan.
However, ARMs aren’t for everybody because there is a certain level of uncertainty. For one, interest rates often fluctuate based on the economy and the lender’s margin. Still, this option might work well if you carefully plan your VA loan repayments, and you may also benefit from loan renegotiations.
Hybrid Adjustable Rate Mortgage (ARM)
If you’re uncertain about any of the above mentioned traditional repayment plans, you might want to consider the Hybrid Adjustable Rate Mortgage or the Hybrid ARM. With the Hybrid ARM, you start with a fixed introductory interest rate for a short period, usually at three years or more, depending on your lender. After the set period, the rates will be adjusted accordingly on an annual basis. Similar to that of a traditional ARM, the maximum interest rate is at 5 percent for the entire loan life. Hybrid ARMs with a fixed rate for less than five years can’t be adjusted by more than 1% at the end of the fixed period, and the total adjustment over the life of the loan can’t exceed 5%.
The Hybrid ARM might be ideal for homeowners who are thinking of relocating soon. The first few years on the introductory fixed interest rates will give borrowers time to save cash for a permanent residence later on.
Other Repayment Considerations
VA loans usually have a loan lifespan of 15 to 30 years, depending on a variety of factors, but you can adjust the lifespan according to your needs. Although short repayment periods will entail higher monthly costs, these are effective at cutting down the overall cost of a loan, particularly the interest payments when compared to mortgage loans with longer repayment periods. This means that when applying for a VA Loan, make sure that you discuss the repayment period with your trusted VA loan officer.