VA ARM Loan | When Is It a Good Idea?


Jennifer Schmidt
Military VA Loan contributor

For your next home mortgage, a VA ARM loan can be a great option for eligible borrowers. This loan option could allow you to benefit from a lower interest rate for a number of years.

But before you apply, it’s a good idea to know all the pros and cons of this loan, so you can make the best choice for your financial situation.

Check your VA home buying eligibility. Start here (Mar 1st, 2024)

What is a VA adjustable-rate mortgage?

The VA Adjustable-rate mortgage is backed by the U.S. Department of Veterans Affairs. This mortgage features an adjustable interest rate that can increase, or even decrease during the term of your loan.

How does a VA ARM loan work?

ARM vs. fixed-rate loans: What’s the difference?

Fixed-rate loans

With a fixed-rate loan, your interest rate remains the same each month throughout the loan’s duration.

For example: If your 30-year $400,000 loan has a 5% interest rate, your payment before taxes and insurance would be $2,147.29 per month for the entire 30 years.

ARM loans

With ARM loans, the interest rate is variable and adjusts based on the loan agreement, typically on an annual basis.

For example: If you had a 30-year $400,000 loan with a 5% interest rate, your payment before taxes and insurance would be $2,147.29 the first year, and then that amount could increase to 6% the second year for a payment of $2,398.20.

VA Hybrid ARM loans

A VA Hybrid loan has an interest rate that starts at a fixed rate for a set period of time at the beginning of the loan’s term and then converts to an ARM loan.

Usually, this type of loan is a 3/1 ARM, 5/1 ARM, or 7/1 ARM. This means your interest rate for each type of loan would be a fixed rate for either 3, 5, or 7 years, and then typically adjusts each year after that time based on the Constant Maturity Treasury.

Check your VA mortgage rates. Start here (Mar 1st, 2024)

When is a VA ARM loan a good idea?

When fixed rates skew higher, borrowers may choose to apply for an ARM, since ARM rates typically skew relatively lower than fixed interest rates. Depending on a borrower’s homeownership goals, it could make sense to get an adjustable-rate mortgage, securing a lower interest rate for the beginning of the loan term, potentially with the goal of refinancing once rates come back down.

ARM loans can also work well for borrowers who plan on moving to a new home prior to their rate adjusting.

Pros & cons of a VA ARM loan

Potential benefits of a VA ARM loan include:

More buying power: Applying for a VA ARM loan could give you the ability to buy a more expensive home because the initial interest rate is lower. The payment could be more affordable when your income may also be lower at that time.

Potential savings if you plan to move: If you’re nearing retirement or plan to transfer out of state prior to the interest rate adjusting, then it’s possible to save money when you choose a VA ARM loan because you are avoiding being adjusted to a higher rate.

Interest rates could potentially decrease: Although rates could adjust higher after the introductory fixed-rate period is over, they could also decrease depending on market conditions, which means you could potentially access a lower rate than was available when you secured your mortgage.

Reasons a VA ARM loan may not be beneficial:

Monthly payments could increase: If you’re unable to refinance or move to a new home before the initial fixed-rate period ends, or if you get an adjustable-rate mortgage that consistently increases each year, your payments might increase, making it a more expensive option over the life of the loan.

Less predictable than a fixed-rate mortgage: A VA ARM loan can adjust based on various parameters and potentially increase each year, making it less predictable than a fixed-rate loan that has a more consistent repayment schedule.

A fee is usually required for getting a VA ARM loan: The VA funding fee is usually paid by the applicant when securing a VA loan. This fee can range from 1.25% to 3.3%, depending on the size of your down payment (if any), and whether you’ve previously used your VA home loan benefit.

VA ARM requirements 2024: Who is eligible?

To qualify for a VA ARM loan, you’ll need to meet certain eligibility criteria established by the Department of Veterans Affairs.

Generally, VA loans are accessible to veterans, active-duty service members, and surviving spouses looking to purchase a primary residence.

While the VA sets its own minimum thresholds for borrowers, homebuyers will need to qualify for the individual lender’s financial requirements as well.

Here are some of the documents and information you can expect to be required to provide when applying for a VA mortgage loan”:

Certificate of Eligibility (COE): This document establishes the nature of your military service and confirms your eligibility for the VA home loan program. Your lender can help you request it.

Proof of income: Your lender will want documentation that shows your total income, to confirm you can make the monthly mortgage payment for your house, typically in the form of pay stubs, W-2 forms, and bank statements.

Credit score: The VA itself does not set a minimum credit score to qualify for a VA loan. However, the VA does not issue the loans itself, and your lender will have its own minimum credit score, typically in the ballpark of 620.

Debt-to-income ratio (DTI): Your DTI reflects the amount of your gross monthly income that is allocated to paying debt. As with a credit score, the VA does not set a minimum but most lenders will want to see a DTI that is less than 41%.

Check your VA home buying eligibility. Start here (Mar 1st, 2024)

Understanding your VA ARM loan payments

Loans typically adjust once per year. There are limits, known as caps, that determine how much the rate can be adjusted — including how much it can change yearly and over the life of the loan.
For example, if a loan is written as a 1/1/5, that would mean the first time it’s adjusted, it could go up or down by a maximum of 1%, and then the next year it could go up or down by 1% again. However, the most it could adjust during the lifetime of the loan is 5%. Understanding the maximum caps gives you the ability to determine if the maximum loan repayment is feasible for you to repay in the future.

Check your VA mortgage rates. Start here (Mar 1st, 2024)

VA ARM loan FAQ

What is a VA ARM?

A VA adjustable-rate mortgage — or VA ARM loan — is a type of VA loan available to veterans who qualify based on the duration of their active military service.

Does the VA offer ARM loans?

The VA doesn’t fund the loans directly, instead, they insure a portion of the loan so private lenders offer affordable home loans to veterans. That said, it is possible to get an adjustable-rate loan that is guaranteed by the VA.

What is a 5/1 ARM VA loan?

A 5/1 ARM VA loan is an adjustable-rate VA loan that has an initial fixed rate that lasts for the first five years of the loan and then converts to an adjustable-rate loan with rate adjustments each year after that initial five-year period.

Is it hard to qualify for an ARM loan?

How difficult it will be to qualify for an ARM loan depends on the specific financial situation of the loan applicant. The mortgage lender will make a determination, typically based on the borrower’s income, credit, and DTI.

When does an ARM loan make sense?

An ARM loan makes sense for homeowners who anticipate they will sell the house within a few years — before any rate changes kick in.

Bottom line: Benefits of a VA ARM loan

Once you know exactly how a VA ARM loan can benefit you and your family, it brings you one step closer to home ownership.

A VA ARM loan features all of the benefits of a VA loan, including:

  • No down payment required
  • Relatively low mortgage rates
  • Flexible credit score requirements
  • No mortgage insurance required

All of these benefits mean a VA loan can be a great option for eligible borrowers.

Check your VA home buying eligibility. Start here (Mar 1st, 2024)