VA Hybrid Loan
In recent years the VA hybrid loan has become highly popular among veterans and military home owners nationwide due to its very attractive interest rates. VA hybrid loans have much lower interest rates than 30 year fixed and even 15 year fixed loans.
Why do VA hybrid loans have lower interest rates?
A simple example:Lets try to do a real life example. Lets say a friend of yours wanted to borrow $100 from you. If your friend said he would pay you back in 1 week how much interest would you charge? (this is an example and I realize you may not charge a friend, but bare with me here). If that same friend said he would take 6 months to pay you back, would that change your interest or your willingness to lend? Now imagine that friend said it would take 3 years to pay you back, what would that cost your friend?
Banks are the same way; the shorter amount of time you will be borrowing money, the lower the rate. Now it is true that the VA hybrid loan can and is used over a 30 year period, however the fixed rate portion is a short time, normally 3 or 5 years. So a bank is willing to give you a much lower interest rate during the fixed period of the loan because the bank knows that if rates go up later they can raise your rate.
A complex example:
A hybrid ARM features an interest rate that is fixed for an initial period of time, then floats thereafter. The "hybrid" refers to the ARM's blend of fixed-rate and adjustable-rate characteristics. Hybrid ARMs are referred to by their initial fixed-rate and adjustable-rate periods, for example, 3/1, is for an ARM with a 3-year fixed interest-rate period and subsequent 1-year interest-rate adjustment periods. The date that a hybrid ARM shifts from a fixed-rate payment schedule to an adjusting payment schedule is known as the reset date. After the reset date, a hybrid ARM floats at a margin over a specified index just like any ordinary ARM.
The popularity of hybrid ARMs has significantly increased in recent years. In 1998, the percentage of hybrids relative to 30-year fixed-rate mortgages was less than 2%; within 6 years, this increased to 27.5%.
Like other ARMs, hybrid ARMs transfer some interest-rate risk from the lender to the borrower, thus allowing the lender to offer a lower note rate in many interest-rate environments.