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Understanding Modern VA Loans

What is VA IRRRL?

The VA has a really neat program called the ‘VAIRRRL.' You might be thinking that there are many 'Rs' in there. It actually stands for "VA Interest Rate Reduction Refinance Loan." The design of this program is to take a VA loan that VA previously guaranteed and allow the veteran or the service member to lower their interest rate involving fewer costs and hassle without appraisals.

Well, right now, something new is coming up, which is a kind of back into Vogue because you know, if you haven't been under a rock recently, the rates have gone up, and they've gone up quite a bit lately.

So a lot of people are scrambling going, “Oh My Gosh! Did I just miss the train?”

Did You Really Miss the Rate Train?

Did I miss the rate train? Uh, yeah, kind of, sort of, but you haven't totally missed it yet!

You must be wondering then what that notion is. They're running it. The jump on the train is dauntless. Yeah, you can still get on this train, but it's going to be in a little different way this time.

Now, 30 years fixed-rate VA loans are still good. You can still get one around 2.75%. You can do even like a monster lender. Cut it at three and a quarter percent. It's kind of how it works in these half-point increments, but the VA has come out well, not just come out. They've had it forever. This just hasn't been used much.

VA’s Adjustable Rate Mortgage Explained

Recently, the VA has an adjustable-rate mortgage what's called a five-one-arm. Before you flip up, flip out and turn me off until listening to this video, no, this arm from the VA is entirely different than the typical adjusted rate mortgage in today's market.

Let me explain the difference to you.

Conventional arms are kind of a go nuclear after the initial period. So it's fixed for five years, seven years, ten years; it's called five one seven one or ten one arm.

After that initial locked period, the authorities fix that interest rate at sometimes lower interest rate than the 30 years fixed. And then, after that period of 30 years is over, it revolts and reverts to a one-year adjustable.

Now, the problem with these conventional arms is that they can really leap after the initial fixed period. It can go up or down, and typically, it goes up to 5%. Imagine if you lock something in three and a quarter, and then all of a sudden, the next time you wake up, and you're paying eight and a quarter. It’s a big shock for you. Due to this reason, they're called caps.

Many people do not like the adjustable-rate mortgage option. They may like the starting payment, but they don't like what may happen afterward, five or seven years down the road. Therefore, the 30 years fixed has been the more popular option among people.

How VA Works Differently?

With the VA, it's completely different. What loan providers do is what they say.

“Hey, I'm going to give you a fixed rate for five years, not the 30.” But the VA will do this.

 It’s going to go ahead and make that interest rate a lot more attractive, and many times, it's a 0.5% reduction in the interest rate. Isn’t it great?

So the question is, what can you get on a 30 year fixed rate?

 If you agree only to have that rate fixed for five years, the VA will actually lower that rate by 0.5%. So you figure, “Hey, 30 years fixed VA is sitting around 2.75, right?” Well, how about 2.25 fixed for five years now, before you say, “Yeah! I'm just still not interested in arms.”

The Real VA's Difference

Mainly VA’s have different caps, and the main cap that most people really care about is the adjustment, the annual adjustment gap. It's how much the interest rate can go up or down after the initial fixed period. The VA only allows it to go up 1% per year. So it doesn't just go nuclear.

After the first five years, it doesn't just blow up and costs people their homes. There's no negative amortization like they had in those loans that got everybody in trouble back during the financial crisis.

If let's say, after five years, you locked in at 2.25%, you had that fixed for five years in year six, the worst it can be is 3.25%. And then the worst it could be in year seven is 4.25%, and even worst in the following year would be 5.25%.

Now I hope that you understand how it works.

It’s actually tied to a very safe adjustable index which they can adjust anytime. But right now, it may be 3%, so it wouldn't even adjust.

Just to hammer this down, the BA now has an option, not like their fixed rate, not like the adjusted rates of the other conventional loans, but they have a very viable arm rate. I'm actually looking at that for many of my clients.

But the question is, why would you take an arm over a fixed rate?

 Well, what if you're only going to be in the home for three years? What if you're only going to be in the house for five years? How about six or seven?

You know, the typical homeowner, the average homeowner moves every four to seven years. The average mortgage life is like 4.8 years.

Now I suspect that, with COVID, the term will be obviously longer, especially with people having ridiculous low-interest rates and probably not wanting to move because they can tell her work. So it would probably be a bit longer.

At the same time, you know there are a lot of people coming to age now and more kids that are getting to that home-buying age. According to some recent studies, there’s going to be an influx of buyers in the market. This means that we will see a lot of movement in the market in the next two to three years. The mortgage bankers association predicted that interest rates would move. They were saying like 3.6%, and by the end of 2021, it will be 2%, while by 2022, it will be at 4.5%, and by 2023, it'll be 5%.

Now how does that arm sound to you? It sounds pretty good to me.

 If you ask about my opinion, it would be that if I know I'm only going to have five, six, seven years, I'll take the worst-case scenario on the arm, especially if it's a VA loan because after all I've saved all that money for the first five years I attend. I can maybe afford to lose a little bit in year six and year seven. And that's not a big deal for me, given the situation. I am satisfied with that.

That's the thing that you have to do when you're considering this option.

You have to look at the term of your expected tenure in the property. And honestly, most people can't see past seven or eight years. I've had clients say, “I'm just going to be probably going to be in the house. Rick, I'm here forever. You're just going to dig a hole in the backyard and just bury me here. Okay!” That's great.

But let's be financially savvy about this too.

Can you use the half a point reduction in the interest rate as a tool to be better for your short and long-term financial objectives? Maybe, maybe not, but let's take a look at it anyway.

Through this explanation, I just wanted to make sure you're aware of this option; VA adjustable-rate mortgages, the VA five one arm. Believe me; it's half a percent better in rate than the 30 years fixed rate option!