Different Types of VA Home Loans Available in California

California home buyers who use the VA loan program are often surprised by the number of choices they have when it comes to their mortgage financing.

The truth is, military and veterans who use the VA program have all of the same choices a person has when using a conventional or “regular” mortgage loan. You can choose everything from the interest rate structure to the length of the term, and more.

This guide explains some of the different types of VA home loans that are available to military members and veterans in California. This information will help you choose the right loan features based on your financial situation and long-term housing goals.

The Fixed-Rate VA Loan

One of your most important choices relates to the interest rate structure. And in this context, there are basically two types of VA loans—fixed and adjustable.

As the U.S. Department of Veterans Affairs explains: “VA loans can be a fixed-rate or adjustable rate mortgage (ARM).” Most borrowers in California choose the fixed mortgage option, because it offers stability over the long term.

But what is a fixed-rate VA loan, exactly? And how does it work?

• VA Loan: This type of mortgage loan is available to veterans, active-duty service members, and some qualifying spouses. VA loans are backed by the U.S. Department of Veterans Affairs, which reduces risk for lenders. Eligible borrowers can buy a house in California with no down payment and no mortgage insurance.
• Fixed-Rate Mortgage: This type of home loan has an interest rate that remains the same throughout the entire term of the loan. This means your monthly payments stay consistent, making budgeting easier. Typically, fixed-rate mortgages come with terms of 15 or 30 years, but other options might be available.

The fixed-rate type of VA loan can offer peace of mind with a stable monthly payment that never changes throughout the loan term. This predictability makes budgeting easier and shields you from the threat of rising interest rates.

However, the interest rate on the fixed type of VA loan is typically higher than the initial rate on an adjustable (ARM) loan. Additionally, you may pay more in total interest over time when compared to an ARM, especially if interest rates go down.

Bottom line: The fixed-rate type of VA loan is well suited for California home buyers who prioritize stability and are comfortable with a potentially higher interest rate.

The Adjustable-Rate Mortgage (ARM) Loan

VA home loans are also available with an adjustable mortgage rate, or ARM.

Most of the ARM loans in use today start off with a fixed interest rate for the first year or several years. After that, the interest rate will begin to adjust annually. Whether it adjusts up or down will depend on current market rates at the time of adjustment.

So there’s more uncertainty with this product, compared to the more popular fixed-rate type of VA loan.

But ARM loans also offer some advantages. They usually provide a lower interest rate during the initial phase. This phase typically lasts anywhere from 1 to 7 years. During that timeframe, the homeowner might enjoy a lower interest rate (and lower monthly payments) than if they had used a fixed-rate VA loan.

California military members typically move around every few years. An adjustable-rate VA loan can work well in this type of situation. You could enjoy a lower interest rate during the first few years, and then sell the home when it’s time for your next PCS move.

It’s also possible to refinance from an adjustable into a fixed-rate VA loan later on. This is another common strategy among borrowers who initially use ARM loans to buy a house.

15-Year Versus 30-Year Term

California home buyers who choose the fixed-rate type of VA loan can also decide whether they want a 15- or 30-year repayment term. And here again, there are pros and cons on both sides of the fence.

As it explains in the official VA buyer’s guide:

“VA loans can be issued for 30 years or 15 years. Shorter-term loans typically have a lower interest rate and lower total cost; however, they also have higher monthly payments.”

Borrowers who might prefer a 15-year VA loan:

• Values paying off their home quickly: They prioritize building equity and owning their home outright in a shorter time frame.
• Has a higher income: They can afford higher monthly payments because the shorter term typically results in higher monthly payments compared to a 30-year mortgage.
• Wants to save on interest: With a 15-year term, they pay less interest over the life of the loan compared to a 30-year term, potentially saving thousands of dollars.

Borrowers who might prefer a 30-year VA loan:

• Wants lower monthly payments: The longer term spreads out payments over a more extended period, making each monthly payment more manageable.
• Values flexibility: Lower monthly payments free up cash flow for other expenses or investments, providing more financial flexibility.
• Plans to move or refinance: They might not intend to stay in the home for the entire 30-year term and might plan to sell or refinance before the loan is paid off.

As you can see, you have several important choices when buying a home in California with a VA-backed mortgage loan. You can choose the interest rate structure as well as the term, (among other choices we haven’t even covered).

Have questions? This article underscores the importance of talking to a knowledgeable mortgage professional who understands the VA loan program. At Bridgepoint Funding, we specialize in VA loans and work with borrowers all across California. Please contact us with any questions you have about this program!