The Truth About The VA Hybrid Loan

The Department of Veterans Affairs offers veterans several options for VA home mortgage loans. One of the most misunderstood is the VA Hybrid ARM loan. This loan combines features of both a fixed rate mortgage and an adjustable rate mortgage. In the VA’s version of the hybrid loan, it carries a fixed rate mortgage for a period of years and then the loan becomes an adjustable rate mortgage after that. You have undoubtedly heard about all the problems with adjustable rate mortgages. Let’s dices why the VA hybrid loan is different.

Common misconceptions about the VA hybrid loan

An adjustable rate mortgage will cause me to lose my home.

The VA hybrid loan is the type of loan the media have warned against.

There is no limit on how high the interest rate can go.

My balance will never be paid down.

The VA hybrid loan can’t be a legitimate loan because the VA would never promote this type of loan.

The truth about the VA hybrid loan

The loan does have an adjustable interest rate. The truth is that the loan is much more stable than other adjustable rate mortgages, since it is based on an index called the CMT, which is a monthly average of the U.S. Treasury index, historically one of the most stable indexes.

The adjustable rate mortgages heard about in the media have little to do with VA adjustable rate mortgages. The VA has never allowed veterans to get into a loan in which income was overstated or to purchase a home that is more expensive than the veteran can afford, which were some of the main causes of the rash of foreclosures in the market.

You may also think that the interest rate on the VA hybrid loan has no limit to how much it can rise. In fact, the VA hybrid loan has caps on both its annual and lifetime interest rates. The interest rates for the 5-1 hybrid, for example, can only go up a maximum of one percent per year, and then only after the first five years of the loan. The interest rate could also go down at that point, as well. Interest rates can never go up more than 5% than where they were when the loan was taken out.

Another false belief is that with the VA hybrid loan, you will never pay down your balance. Unlike an interest-only ARM or an option ARM, which do not pay down your principal balance each month, the VA hybrid loan applies a portion of every monthly payment towards your principal. In many cases the VA hybrid loan pays your principal down faster than a fixed-rate mortgage will in the first three to five years of the loan.

Finally, some people think that the VA hybrid loan cannot be a VA loan because they think the government would not endorse an adjustable rate mortgage. After the Veterans Benefits Improvement Act of 2008, the VA increased the issuance of hybrid loans to veterans. The Department of Veterans Affairs guarantees the VA lender that the VA hybrid loan will be a safe and beneficial loan for veterans.

It is true that there are some dangerous ARM loans in the current mortgage market. However, the VA hybrid loan is not one of them. If you are a veteran and would like to know more about the VA hybrid loan, you can contact an approved VA lender.