VA Loan Types
The popular VA mortgage loan has been around for literally decades and is the number one mortgage program chosen for those who qualify. After all, they’re easy to qualify for, closing costs are less when compared to conventional or FHA loans and best of all they require no money down. Not a bad deal. But in addition to these benefits there’s more than one type of VA loan in which to choose. What are the different choices?
VA offers two distinct mortgage types, fixed rate and adjustable rate mortgages. Fixed rate loans are mortgage loans whose interest rate never changes throughout the life of the loan. Yet there are different types of fixed rate loans as well when it comes to selecting the length, or the term, of the VA loan. These terms are called the amortization period, the length of time it will take to completely pay off the mortgage. Most VA lenders offer fixed rate mortgage loans in five year increments beginning with a 10 year loan to a 30 year.
The second type of VA loan is the adjustable rate mortgage, or ARM. An ARM can change throughout the term of the mortgage but only under strict, predetermined rules. An ARM rate is determined by selecting an index and adding the margin. The index most commonly used is the 1-year Constant Maturity Index, or CMT yet other indexes such as the LIBOR and Prime Rate have been used in the past. A typical margin is 2.00 percent. If the current CMT is .25 percent then when added to the margin the new note rate is 2.25 percent. ARMs also have limits on how much the new rate can adjust. Called caps, these limits are typically one percent higher than the previous rate and a five percent cap above the initial rate.
The third choice is really an ARM in disguise and is called a hybrid. A hybrid is fixed for a predetermined period before it changes into a traditional ARM. The fixed period is typically for a three or five year period and are characterized by the notation of 3/1 or 5/1, indicating the three year or five year initial fixed period with an adjustment once per year with typical caps at one percent above the previous year and five percent over the life of the loan.
The best way to determine what VA loan type is right for you is to evaluate the loan types. Each option has its applicability depending on the situation. You can also consult a loan officer to evaluate your options. Remember, any good loan officer will take the time to provide you a full consultation on your options.