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MORTGAGE
VA Fixed-Rate vs. VA Adjustable-Rate Mortgage
What you'll learn: What is a VA ARM, pros and cons, and how to choose a fixed-rate or adjustable
EXPECTED READ TIME: 4 MINUTES
Updated February 8, 2023
Are VA home loans fixed? They can be – but only if that’s the option you chose. There are two primary choices in home loans specifically for veterans and servicemembers: VA fixed-rate mortgages and VA adjustable-rate mortgages (ARMs). Both types have the same attractive VA loan benefits and eligibility requirements, but there are key differences to understand. Keep reading to decide if a VA ARM or fixed-rate is best for you.
What is a fixed-rate VA loan?
With a fixed-rate mortgage, you pay the same interest rate for the entire term of the loan. That means your monthly principal and interest payment also remain fixed throughout the life of the loan and you’ll know the full cost of the mortgage before you sign the loan agreement.
For example, if your rate is 7 percent when you close, it will remain at 7 percent for the life of the loan. Your monthly payment will stay consistent year after year (unless you choose to include taxes and insurance in your payment, which can vary).
The two most popular fixed-rate terms are 30 years and 15 years. You can choose the option that works best for your circumstances.
30-year Fixed Term |
15-year Fixed Term |
Typically a higher rate |
Typically a lower rate |
Smaller monthly payment |
Higher monthly payment |
Longer time to pay off loan |
Shorter time to pay off loan |
Costs more overall |
Costs less overall |
What is an ARM VA loan?
Conversely, VA ARM rates start fixed for a specified period and then shift to a variable rate for the rest of the term – often 30 years. During the variable period, an ARM’s rate can fluctuate based on market conditions. But there’s reward to the risk: VA ARM loan rates during the introductory rate are often lower than even the best fixed-rate options. And there’s always a chance they will get lower during the adjustment period, depending on the market.
Common types of VA ARM loans include:
- 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.
For example, here’s how 3/1 ARM rates could work:
Year 1 |
6.50% |
Year 2 |
6.50% |
Year 3 |
6.50% |
Year 4 |
7.00% |
Year 5 |
7.50% |
Year 6 |
4.00% |
As you can see, the rate remains the same (6.50 percent) for the first three years. Then, it changes annually based on the market rate, also called an index rate.
What are the benefits of VA ARM rates vs. fixed rates?
All mortgage types have advantages and disadvantages. Consider these fixed and adjustable mortgage rates pros and cons.
VA ARM Loans |
VA Fixed-Rate Mortgage |
Pros:
|
Pros:
|
Cons:
|
Cons:
|
When should you choose a VA fixed rate?
If rates are historically low, as they were in 2020, many borrowers prefer to take advantage of them and lock in their rate for a full 15- or 30-year term. Even though the ARM rate starts lower, it may adjust to a higher rate after the introductory period compared to a fixed loan.
When should you choose a VA adjustable rate?
VA ARM loans are typically more appealing when interest rates are high. Let's assume conventional rates are 5 percent for a 30-year fixed mortgage. An adjustable rate might start at 4.25 percent for an introductory period and could increase or decrease over time with market conditions.
It’s also a common practice to move or refinance with a VA streamline before ARM rates increase. That strategy typically works best for the borrower with an appetite for risk and feels confident monitoring the market.
What’s right for me?
VA ARM loans are great options for the right homebuyer. As always, your financial situation will be the deciding factor in determining the best mortgage type for you. Consult a loan officer if you need help along the way.
Want to learn more about the VA home loan program? Download our free eBook.
