What’s A VA Adjustable-Rate Mortgage Loan?

Department of Veterans Affairs (VA) loans are one of the few options that offer the opportunity to buy or refinance a home with a 0% down payment or equity amount. It’s a great benefit for eligible active-duty service members, qualifying reservists, veterans or those who the VA classifies as a surviving spouse. You can get a fixed rate for a VA loan, but adjustable-rate mortgages are attractive for a number of reasons.

Adjustable-rate mortgages (ARMs) feature interest rates that can change as time goes on. These have hybrid or variable rates. Mortgages with a fully variable rate have a payment that can change every month and are less common. More frequently, you’ll see hybrid ARMs. VA-eligible borrowers can combine the benefits of a VA loan and an ARM with a VA ARM mortgage loan.

What Is A VA Adjustable-Rate Mortgage?

VA ARMs are hybrid ARMs. This type of home loan has a fixed rate for a number of years before adjusting. The rate then typically adjusts once per year. Rocket Mortgage^® offers 5/1 ARMs for VA loans. This means the rate stays fixed for 5 years before adjusting once per year based on an index every year after that. ARMs have 30-year term lengths.

You can get a lower rate at the beginning of the loan because investors have to project interest rate changes due to inflation for a shorter period than they would on a 30-year fixed-rate loan. In contrast, the combined payment for principal and interest on a fixed-rate mortgage never changes. This provides some certainty, although taxes and homeowners insurance can vary.

How Do VA ARM Loans Work?

Different lenders may offer different types of VA loans, but to give you a general idea of how an ARM loan works, we’ll be going over the 5/1 ARM that we offer.

In a 5/1 ARM, the 5 refers to the number of years that the rate stays fixed at the beginning of the loan. So in this case, rates stay fixed for 5 years. The 1 means the rate adjusts once per year once the fixed time frame is up.

Some lenders may offer 7/1 ARMs and 10/1 ARMs, which have a fixed period of 7 and 10 years, respectively. Longer fixed periods could be more ideal for home buyers who prefer more time to figure out their next steps before their rate could increase.

VA ARM Rates

All VA ARMs are tied to an index called the constant maturity treasury. On the day of your adjustment, this number is added to a margin to come up with your new interest rate on which your payment will be based going forward until the next adjustment.

Each time your payment adjusts, your loan is reamortized. This means your payment is recalculated based on the new VA loan rate and the number of years remaining in your loan term. So, assuming a 30-year loan, your new loan payment at the first adjustment would be based on the 25 years remaining on your term.

VA ARM Rate Caps

There are also caps on how much your rate can adjust up or down each year. A common cap structure for VA loans is written 1/1/5. This means the first time your rate adjusts up or down, it can do so by a maximum of 1%. For each subsequent adjustment, it can go up or down by only 1%. Finally, the rate can go up or down a total of only 5% throughout the loan.

Refinancing A VA ARM Loan

VA ARMs can be refinanced into fixed-rate loans. Because of this, you’ll want to keep your credit in decent shape at all times, so you don’t get stuck without options. Rocket Mortgage requires a minimum median FICO^® Score of 580 to refinance.