VA Adjustable Rate Mortgage (ARM)
If you’re currently the proud owner of a VA mortgage, congratulations. If you’re the proud owner of a VA mortgage with an adjustable rate mortgage, or an ARM, additional congratulations are in order. How’s that?
An ARM rate can and will adjust at some point during the loan term. In fact, most VA ARMs will adjust once per year, based upon the original loan terms. And while the VA streamline refinance loan program, or IRRRL, allows for eligible veterans to refinance into a fixed rate mortgage with reduced documentation and credit requirements, it’s difficult to leave an ARM in today’s markets.
For example, let’s say you bought your VA loan five years ago and used a VA ARM. Your VA ARM was likely based on the 1-Year Treasury, Constant Maturity index at 3.25 percent. Let’s also say that your margin was 2.25%. That gives a fully indexed rate of 5.50 percent. That means if all things remained the same over the previous five years, your current ARM rate would be around 5.50 percent. That’s not only high in today’s standards, it’s also an ARM.
But the 1-Year Treasury isn’t 3.25 percent today, it’s astounding low at 0.1775 percent. You read that right: 0.1775 percent. By adding the margin to obtain your new ARM rate, your monthly payment would be based on 2.43 percent; way lower than 5.50 percent and lower than today’s current 30 year fixed rates.
That’s the quandary with a VA ARM right now. Yes, it might be prudent to refinance out of an ARM into these low, low fixed rates. But it’s hard to let that ultra-low payment go right now because there’s nothing lower.
For those with a VA ARM, it’s tempting to refinance into a VA streamline loan but it’s certainly hard to discard your low adjustable rate. What to do? Contact your VA lender, apply for a VA streamline refinance then wait until rates begin to inch up. When they do, call your lender and lock in a fixed rate loan.
