VA Fixed-Rate vs. VA Adjustable-Rate Mortgage

Buying a new home is exciting. You'll be going to open houses and looking at real estate listings for hours online. But before you put in an offer, you'll need to secure a mortgage. There are two primary choices in home loans available to veterans: VA fixed-rate mortgages and VA adjustable-rate mortgages (ARM). In this article, we'll be talking about both types. That way, you can decide for yourself if a VA fixed-rate or VA adjustable-rate mortgage is best for you.

What is a VA fixed-rate mortgage?

A VA fixed-rate mortgage offers one stable interest rate for the entire time you have the loan. For example, if your rate is 4% when you close your loan, it would remain at 4% for the life of the loan.

Some borrowers choose to include their taxes and insurance in their house payments. In that case, any increase or decrease (in insurance or taxes) would change the payment amount.

VA fixed-rate mortgages are available for different durations. The two most popular terms for purchases and refinances are:

• 30-years
• 15-years

Borrowers can choose the term that works for their particular circumstances. For example, if they want the lowest payment possible, a 30-year term would be the best choice. But if they want to pay off their mortgage sooner – a 15-year term would help them achieve that goal faster.

When comparing rates, typically, 15-year rates are lower than 30-year rates. But, because the term is shorter, the payment would be higher. If a borrower wanted a 15-year VA loan, they would need to qualify for the higher payment. Another advantage with a VA 15-year fixed-rate loan is, you may pay less interest over the life of the loan.

What is a VA adjustable-rate mortgage?

VA adjustable-rate mortgages and fixed-rate mortgages are very similar to conventional loans. Except VA mortgages offer zero down-payment and generally lower interest rates than traditional loans. That's why they are a very attractive choice for veterans. 

Let’s look at the differences between a VA fixed-rate and VA ARM.

VA ARMs typically lock into a lower introductory rate than a fixed-rate loan, but your interest rate can change over time with the market.

Adjustable-rate loans can come in several variations. The two main factors that make up the rate are:

1. The current market rate or "index rate", which can adjust up or down.
2. The "margin" typically stays the same over the life of the loan.

These two factors combine for your total adjustable-rate.

With a VA ARM, the initial interest rate is set for a specific amount of time. After that, it changes with market conditions.

Here are a few examples:

• 3/1 ARM — has a fixed interest rate for three years and adjusts each year after. 
• 5/1 ARM — has a fixed interest rate for five years and adjusts each year after. 
• 7/1 ARM — has a fixed interest rate for seven years and adjusts every year after. 

Here’s another example comparing fixed and adjustable loans. Let's assume conventional rates are 5% for a 30-year fixed mortgage. An adjustable rate might start at 4.25% for an introductory period and could increase or decrease over time with the market conditions. The 4.25% is calculated by combining the index rate and the margin to arrive at 4.25% in this example.

If rates are historically low — like in 2020 — most borrowers take advantage of them and lock in their rate for 30-years. Even though the ARM starts lower, it may adjust to a higher rate after the introductory period compared to a fixed loan. VA Adjustable-rate mortgages are more appealing when interest rates are high.

What are the benefits of a VA adjustable-rate mortgage vs. a VA fixed-rate?

With a VA ARM, there are some real benefits to consider:

• Often, you can lock into an initial lower rate compared to a fixed-rate VA loan.  That can be beneficial if cash flow is tight now, but you expect to increase your income over time. It might also allow you to get into that home you couldn't afford with the higher interest rate. Plus, Jumbo ARM rates can be lower than fixed.
  
• Rates don't always go up. Rates can also go down. Consider those people locked into rates at 4-5%. With the craziness of 2020, you see rates as low as the 2-3% range. Your rate doesn't fluctuate daily, monthly, or even quarterly. You may find your rate does go down versus up over the life of your loan.
• If you know you’re going to move within three to five years, an ARM can be a smart move. It depends on the rates. That's especially true for Jumbo ARMs. In this scenario, you'll move before your rate changes.
  
• VA ARMs have a limit as to how high the interest rate can climb. But make sure you're comfortable with the highest possible interest rate. That way, you understand any potential risk.
  

Is a VA fixed-rate or VA ARM right for me?

As always, your financial situation will be the deciding factor in determining the best loan for you. It's essential, however, to do your homework. And the mortgage professionals at PenFed are here to help you figure out what is better for you — a VA fixed-rate or VA adjustable-rate mortgage. We can help you understand all options and weigh each type of loan’s pros and cons of.