Pros and Cons of VA Adjustable Rate Mortgages (ARMs): What You Need to Know

Adjustable Rate Mortgages are different from traditional 15 or 30-year fixed-rate mortgages because your interest rate will change with market conditions. Depending on your situation, that can be good or bad.
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family outside home they just purchased

Many active duty service members or military veterans qualify for the VA-Guaranteed Home Loan. With current conventional home mortgage rates at record lows, interest rates on VA fixed and adjustable-rate mortgages are especially attractive.

But, there are a few things to know about taking on debt to finance a home, especially the possible pain points of an adjustable-rate mortgage, or ARM.

In 2020, the VA announced that it guaranteed a record 1.2 million home loans during the year, surpassing 25 million loans since the program was established in 1944. Interest rates are still low and the VA can give military members and veterans an advantage in what remains a tight – but loosening – housing market.

VA mortgage loans are very similar to conventional loans found in the civilian world, but tend to offer lower interest rates. And, if a veteran gets into financial trouble (such as losing a job) the VA offers counseling and loan service help to avoid foreclosure. The VA also has protections in place against unreasonable fees and dishonest lending practices.

What is a VA Adjustable Rate Mortgage?

A VA fixed-rate loan offers a stable interest rate. Your mortgage principal and interest payment will never change. Changes in insurance or property taxes can fluctuate up or down.  

ARMs, on the other hand, have interest rates that change based on market factors. 

The advantage of an ARM is that it can often mean a lower interest rate for the first three to seven years of the loan. The latest report from FreddieMac, which guarantees government loans in the United States, indicates ARM loans are about three-quarters to a half percent lower than fixed-rate loans. ARM closing costs are often lower too.

Some mortgage lenders may target VA loan holders with refinancing mailers, some of which may be misleading, according to the Consumer Financial Protection Bureau. But, even legitimate offers may be pitching an adjustable-rate mortgage as a way to keep costs low.

ARMs are different from traditional 15 or 30-year fixed-rate mortgages in that your mortgage payment will change based on market conditions. 

The main risk of an ARM loan is that your mortgage payment is likely to go up over time. This accounts for why ARM loans make up only about 2.5% of home loans.

The Pros and Cons of ARMs 

The Federal Reserve Board offers a detailed review of ARMs, which includes these downsides:

  • Your house payments can go up over time – sometimes by a lot, even with a cap on such increases. But your payment may not go down, even if interest rates drop.
  • You may end up owing more money than you borrowed – especially if interest rates rise rapidly.
  • There are some early payment penalties. 

However, there are notable advantages to the adjustable-rate mortgage: 

  • It’s a good option to buy a house if you expect your income to increase in the future. The lower interest rate and closing costs sometimes can make a difference in order to qualify for a loan or to buy a more expensive house. 
  • Rates don’t always go up. The historically low interest rates of the past few years may make ARM loans attractive in the short term. But interest rates can also rise unexpectedly. Predicting home mortgage interest rates can be a  gamble.
  • If you know you’re going to move in three to five years, an ARM can be smart. In such a future case scenario, the home sells, and the borrower pays the ARM off before payments go up.

Different Types of Adjustable Rate Mortgages (ARMs)

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

For more information on choosing your loan, check out usa.gov/veteran-housing.

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About John Mitchell

John Mitchell is a contributing writer for The Military Wallet. He is a United States Navy veteran and a widely published freelance writer covering military affairs, health care, social services and craft beer through his firm, SnowPack Public Relations. He's also a novelist under the pen name of J. Willis Mitchell. His most recent novel, "Rotors" has just been published. His first novel "Medical Necessity" has a four-star rating on Amazon. Mitchell lives with his wife and writes on the western slope of Colorado. He volunteers each winter as an adaptive downhill ski instructor teaching the joy of the sport to kids, veterans and other skiers living with disabilities.

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