The VA guarantees a variety of home loans. There are two basic types
of loans with two additional options that are appealing to
servicemembers with special financial goals:
Fixed-Rate Mortgage
This is the loan that most people think of when considering a
mortgage. The interest rate never changes, and the monthly payment will
remain the same over the life of a loan. Fixed rate loans are usually
for 15 or 30 years.
Tip: Get a fixed-rate mortgage if stability is important or if you have less confidence about the economy or job security.
Adjustable Rate Mortgage
An Adjustable Rate Mortgage is a fluid loan where the interest rate
changes with fluctuations in the market. The first-year rate (otherwise
known as the teaser rate) is generally a couple of percentage points
below the market rate. The "cap" is the upper limit of the interest
rate. If a teaser rate is 4%, and there is a five-point cap, then the
highest that an interest rate could go would be 9%. The amount that the
interest rate can rise each year is usually limited to one or two
percentage points per year, but the frequency at which the rate adjusts
can vary. If interest rates go up, an ARM will adjust accordingly.
Tip: Get an ARM if you expect to stay in a house for less than five years.
VA Hybrid Adjustable Rate Mortgage Loan
This loan is fixed for period of 3 or 5 years, and then adjusts
annually thereafter. It allows a 1% annual interest rate adjustment
after the initial fixed interest rate period, and a 5% interest rate cap
over the life of the loan. Interest rate adjustments must occur on an
annual basis, except for the first adjustment, which may occur no sooner
than 36 months from the date of the borrower's first mortgage payment
on the 3/1 ARM or 60 months for a 5/1 ARM. The loan term is 30 years for
either of these loans. Some short-term homebuyers like this option
because of the lower rates in the early years.
Graduated Payment and Growing Equity Mortgage
Both of these loans start with a low initial monthly payment and
gradually increase. A GPM begins to increase in the sixth year of the
loan while a GEM will gradually increase payments directly into the
principal of the loan resulting in an early loan payoff.
Mortgage Option Pros and Cons
There are really just two main loan categories -- fixed and
variable-rate. A variable-rate agreement, as distinguished from a
fixed-rate agreement, calls for an interest rate that may fluctuate over
the life of the loan. The rate is often tied to an index that reflects
changes in market rates of interest. A fluctuation in the rate causes
changes in either the payments or the length of the loan term. Limits
are often placed on the degree to which the interest rate or the
payments can vary. Here are some of these pros and cons for these two
main types:
| Fixed-Rate Mortgage |
Adjustable-Rate Mortgage |
| Pro: Homebuyers can determine exactly how much they will pay each month for the next 30 years. |
Pro: Because interest rates are lower for an ARM, it's easier to borrow more. This can help first-time homebuyers afford more home. |
| Con: Buyers pay a premium for predictability as an FRM will generally cost more than a ARM over the life a 15 to 30 year home loan. |
Con: Rising interest rates can create financial hardship if the new monthly mortgage payment rises beyond the owner's budget. |
