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Using an Adjustable-Rate VA Loan to Buy a Home in California

VA loans offer many benefits to military home buyers in California. This program allows you to purchase a home with no down payment or mortgage insurance, removing a major obstacle to homeownership.

Additionally, military home buyers who only plan to stay in a home for a few years could benefit by using an adjustable-rate VA loan. This can bring even more money-saving advantages into the picture, as you’ll soon see.

What Is an Adjustable-Rate VA Loan?

Let’s clear up some terminology before we go any further:

VA loan: A mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA). It’s designed to help eligible veterans and service members purchase homes with favorable terms. VA loans do not require a down payment or mortgage insurance for most borrowers.

Adjustable rate mortgage (ARM) loan: A type of home loan where the interest rate can change over time. It typically starts with a fixed interest rate for an initial period, like 5, 7, or 10 years, and then adjusts annually. The interest rate can adjust upward or downward depending on market conditions.

Put these two products together, and you have a government-backed mortgage loan for military members and veterans, with an interest rate that can change over time.

Key point: VA loans are available with both fixed and adjustable interest rate structures. The fixed option is by far the more popular choice among borrowers, because it offers the most stability over the long-term. But the ARM loan has its place, as well.

According to the VA Home Loan Guaranty Buyers Guide, a publication created by the U.S. Department of Veterans Affairs: “VA loans can be a fixed-rate or adjustable rate mortgage (ARM).”

An Example Using the 5/1 ARM

Most of the VA ARM loans available today are actually “hybrid” mortgage products that combine features of both the adjustable and fixed-rate loan structure. They have a stable and unchanging interest rate during the first several years, after which the rate will begin to adjust annually.

With a 5/1 ARM loan, for example, the interest rate will remain the same for the first five years of homeownership. That’s what the “5” signifies. But after that initial five-year phase, the interest rate will begin to change annually (or every “1” year).

You might wonder why someone would choose to take on a VA loan with an adjustable rate that can change over time. Why would a homeowner want that kind of uncertainty over the long-term?

It has to do with savings.

Generally speaking, ARM loans offer a lower initial interest rate when compared to the more popular 30-year fixed mortgage. This in turn translates into a lower monthly payment, at least during those first few years.

3 Ways to Say When Buying a Home in California

When using a VA loan with an adjustable rate, home buyers in California can potentially enjoy three different kinds of savings:

1. Save up front by eliminating the need for a down payment.

As mentioned above, VA loans do not require a down payment for most borrowers who use the program. That means you could finance the entire purchase price without having to make an upfront investment.

This is a big deal when you consider how expensive it is to buy a home in California. With a conventional (non-government-backed) mortgage loan, the minimum down payment for a median-priced house in California might range from $20,000 to nearly $40,000.

Borrowers with VA loans can avoid this upfront obstacle, and therefore buy a home sooner rather than later.

2. Save money monthly by avoiding private mortgage insurance.

A VA home loan can also help you avoid paying private mortgage insurance (PMI) in California. With a conventional home loan, PMI is typically required when borrowers make a low down payment. This can add hundreds of dollars onto the monthly mortgage payment.

VA loans, on the other hand, do not require a monthly mortgage insurance premium. According to the US Department of Veterans Affairs:

“With a VA loan, you also avoid steep mortgage insurance fees. At 5 percent down, private mortgage insurance (PMI) costs $150 per month on a $250,000 home, according to PMI provider MGIC.”

3. Save more money with a lower interest rate on an ARM loan.

The two benefits listed above apply to both fixed and adjustable-rate VA loans. But if you choose the ARM option, you have another opportunity to lower your monthly housing costs.

That’s because adjustable-rate loans often have a lower initial interest rate when compared to their fixed counterparts. This is the main reason why borrowers in California use ARM loans in the first place. They do it to secure a lower rate and reduce the size of the monthly payments.

Many home buyers who use adjustable mortgage loans plan to either sell or refinance the home before the adjustment phase begins. That way, they can enjoy a lower interest rate during the first few years, while still avoiding the uncertainty of a rate that adjusts annually.

Military life is actually well-suited for this type of mortgage loan, since military members typically move every few years. But even military veterans in California could benefit from using an adjustable-rate VA loan, as long as they have a long-term plan in place.

Have questions? At Bridgepoint Funding, we are passionate about the VA home loan program because it rewards our brave service members. We specialize in this program and serve borrowers all across California. Please contact us if you have questions about using a VA loan.

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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