VA Adjustable-Rate Mortgages Explained

For many veterans and military service members, a VA mortgage loan offers the most affordable way to buy a home. Fixed-rate VA loans get a lot of attention, but VA adjustable-rate mortgages (ARMs) can offer a lower initial interest rate (allowing you to enjoy more affordable monthly payments). However, the rate may change (or adjust) over time, potentially increasing your payments.

In this guide, we'll walk through what a VA ARM loan is and how it works, the benefits and potential risks of VA ARMs, and when a VA ARM may be the perfect loan for you.

What Is A VA Adjustable-Rate Mortgage and How Does It Work?

A VA adjustable-rate mortgage (ARM) is a type of VA loan that functions like other adjustable-rate mortgages. Your interest rate can change after an initial fixed-rate period, unlike fixed-rate loans, which have the same rate for the entire loan term.

VA ARMs have two phases:

1. Initial fixed-rate period: Your interest rate stays the same for a set period of time, and it's usually lower than 30-year fixed-rate loans.
2. Adjustment period: After that period ends, the rate can be adjusted periodically based on market rates, meaning your monthly payment can increase or decrease. The new rate is usually based on a financial index rate plus a lender's margin.

Does the VA Offer ARM Loans?

The Department of Veterans Affairs (VA) does not provide ARM loans (or any mortgages). However, it allows lenders to offer VA adjustable-rate mortgages to those who meet eligibility requirements. All VA loans (including VA ARMs) follow VA guidelines but are issued by VA-approved private mortgage lenders like Freedom Mortgage.

VA ARM vs. VA Fixed-Rate Mortgage

Both VA ARM loans and VA fixed-rate mortgages offer the benefits of the VA loan program, but they differ in how the interest rate and your monthly payment may change over time.

Key Features of VA ARMs

VA adjustable-rate mortgages share many of the same benefits as other VA loans, but have a few unique features to understand:

• No down payment: Like other VA loans, VA ARMs typically don't require a down payment for eligible borrowers.
• Lower starting rates: They usually offer a lower introductory rate compared to 30-year fixed-rate mortgages through the VA.
• Rate caps: VA regulations limit how much the interest rate can change annually and over the life of the loan, protecting you from sudden, drastic increases to your monthly mortgage payments.
• Standard VA loan benefits: VA ARMs also come with the other core advantages of VA loans, including no private mortgage insurance (PMI) and flexible credit guidelines for qualifying borrowers.
• Refinancing flexibility: You may be able to refinance your VA ARM into a fixed-rate VA loan later if your rate adjusts and you want more predictable payments.

How To Calculate a VA ARM Loan Payment

Estimating a VA ARM loan payment doesn't have to be complicated. You can get a general idea by following a few simple steps:

1. Determine your loan amount: Start with the home price and subtract your down payment if you're making one.
2. Use the starting interest rate: VA ARM loans begin with a fixed rate for a set period, such as the first five years of a VA 5/1 ARM.
3. Estimate the monthly payment: Use our mortgage calculator to see what the payment would be based on that starting rate.
4. Consider future adjustments: After the fixed-rate period ends, the interest rate can change. Try different rates in the calculator to see how your payment might increase.

This process can help you estimate both your initial monthly payment and how it might change later. Freedom Mortgage is always available and happy to go through any questions you have about VA ARMs and how the payments could adjust after the initial fixed period.

Types of VA ARM Loans

Like other adjustable-rate mortgages, VA ARMs can be "traditional" or "hybrid." Traditional ARMs typically have a fixed interest period of 1 year, while hybrid ARMs have fixed interest periods of 3, 5, 7, or 10 years. Here's how they compare:

• Traditional VA ARM: The introductory interest rate period lasts for one year. After that, interest rates adjust annually.
• 3/1 VA ARM: The introductory interest rate period lasts three years. After that, interest rates adjust annually.
• 5/1 VA ARM: This is the most common type of VA adjustable-rate mortgage, with an introductory interest rate period that lasts five years. After that, interest rates adjust annually.
• 7/1 VA ARM: The introductory interest rate period lasts seven years. After that, interest rates adjust annually.
• 10/1 VA ARM: The introductory interest rate period lasts 10 years. After that, interest rates adjust annually.

Hybrid ARMs can offer lower initial payments for a longer period, which may be appealing if you plan to sell or refinance before the adjustment period begins, or if you're comfortable with the potential risk.

VA ARM Requirements

To get a VA ARM, you'll need to meet the standard VA loan eligibility requirements. While the VA guarantees the loan, mortgage lenders approve your VA mortgage and provide the money.

Here are a few of the main factors lenders look for:

• VA loan eligibility: Typically, eligible VA borrowers include veterans, active-duty service members, some National Guard and Reserve members, and certain surviving spouses. You'll also need a Certificate of Eligibility (COE) to verify your eligibility (Freedom Mortgage will take care of that for you).
• Credit and income: The VA doesn't set a minimum credit score, but most lenders have their own guidelines. In general, lenders will look at your credit score, your income and employment history, and your debt-to-income ratio (DTI).
• Primary residence: VA loans, including VA ARMs, must be used to purchase or refinance a primary residence, and cannot be used for vacation homes or investment properties (with the exception of up to a 4-unit property in which one unit is your primary residence).
• VA appraisal: The home must undergo a VA appraisal to confirm the property's value and ensure it meets the VA's minimum property standards.
• VA funding fee: Most borrowers pay a VA funding fee, which helps keep the VA loan program running. In many cases, this fee can be rolled into the loan amount instead of paying it up front. Some veterans, such as those with service-connected disabilities, may qualify for a funding fee exemption.
• Closing costs: VA loan closing costs average between 2% and 6% of the total loan amount. You'll be responsible for paying some of them, but the VA prohibits borrowers from paying unnecessary closing costs.

Pros and Cons of a VA Adjustable-Rate Mortgage

A VA ARM can be beneficial in the right situation, but they're not the best fit for every borrower. Weighing the pros and cons of adjustable-rate mortgages is crucial.

Who Should Consider A VA ARM Loan?

A VA adjustable-rate mortgage might be a great financial choice if:

• You expect to move within 5–10 years
• You plan to refinance before the rate adjusts (and your home is on the more expensive side)
• You want the lowest possible starting monthly payment
• You're comfortable with some future rate uncertainty
• You expect your income to increase in the future

It may be less ideal if you want long-term payment stability or expect to stay in the home for decades.

How To Apply for a VA ARM Loan

Applying for a VA adjustable-rate mortgage (VA ARM) follows the same basic process as applying for any VA loan. First, confirm your eligibility by obtaining a COE, which verifies your VA loan benefits based on your military service.

From there, you'll work with a VA-approved lender like Freedom Mortgage to complete the loan application. We'll review your credit, income, and financial history, help you choose the right loan structure (such as a VA 5/1 ARM), and guide you through the underwriting and VA home appraisal process before closing on your loan.

Final Thoughts: A VA ARM Could Be the Right Move

A VA adjustable-rate mortgage can be a smart financial option for eligible borrowers who want a lower starting interest rate and expect to move, sell, or refinance within the initial fixed-rate period. Understanding how the rate adjustments work and how they compare to a fixed-rate VA loan can help you decide whether a VA ARM mortgage fits your financial goals.

If you're considering a VA ARM, the next step is to get prequalified for a VA loan to help you estimate how much money you can save with a VA ARM, how much you may be able to borrow, and what your monthly payment will look like before you start house hunting.