If your mortgage lender has mentioned hybrid financing, our VA Loan expert Grant Moon suggests you consider these key points before you make your decision!
Two basic VA loan types – fixed rate and adjustable financing – are still offered by almost every VA approved mortgage lender. Fixed rate mortgages are fairly easy to understand. With a fixed rate loan, the borrower will always know what their mortgage payment will be, while adjustable rate mortgages are not as predictable. The hybrid option might be just the right balance between the two. Is it right for you?
What is hybrid financing?
A hybrid is a mortgage that has the interest rate fixed for an initial term (anywhere from three to ten years) before changing into a loan where the rate can adjust annually. Why explore a hybrid? Because the initial rates are lower than what a fixed rate can be and borrowers who select a hybrid loan enjoy lower monthly payments.
Hybrid loans are available as a 3/1, 5/1, 7/1 or 10/1. The first digit represents how long the rate will be fixed before changing into an adjustable rate mortgage. The key behind deciding if a hybrid loan is appropriate for you is to consider how long you intend to keep the current mortgage. Ideally, the loan will be retired either by selling the property or perhaps refinancing before the hybrid turns into the adjustable rate period.
Today’s Loan Environment
In today’s interest rate environment, rates are still very, very low. It can be a prudent move to lock in a fixed rate even though the rate might be a bit higher than what is found with an adjustable rate mortgage.
Why? Life happens. And so do closing costs.
When buying and financing over the short term, say less than three years, does it make sense to buy a home, finance it and roll in the funding fee? Say, for example, after two and a half years, what would the balance be on the mortgage if no extra payments were made? On an initial $250,000 purchase, with a funding fee of $5,375, the loan total is $255,375. In 24 months, the loan balance is $246,197 using a 4.00%, 30 year rate. If you sold in 24 months, your existing loan balance is very near the original purchase price. In addition, selling requires closing costs, including sales commissions and title insurance. Short term financing, hybrid or otherwise, may not be your better option.
But let’s say you do decide to keep the home longer than three years and choose a 5/1 loan. That extends the fixed rate period somewhat and, should interest rates rise over that time, you’re protected. But if your plans change and you decide not to sell after all, you’re stuck with an adjustable rate loan – one you never really wanted.
Have more VA Loan questions?
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Meet Your Contributor:
Grant Moon is the President and Founder of VA Loan Captain, author of “The Ultimate Guide to VA Loans” with over 1.8 million copies distributed, and with his team, Home Captain Realty, provides nationwide home buying and selling realty services specifically tailored for the military and veteran community.