A VA Adjustable-Rate Mortgage (ARM) is a type of home loan available to eligible veterans and active service members. Unlike fixed-rate loans, VA ARMs start with a lower interest rate that adjusts over time based on market conditions. These loans can help reduce monthly payments in the short term, making them a good fit for certain financial situations.
How VA ARMs Work
There are different types of VA ARMs, often referred to by terms like 1/1, 3/1, or 5/1.
- The first number indicates how many years your initial interest rate is locked in.
- The second number tells you how often the rate can change after that.
For example, with a 5/1 ARM, your rate stays fixed for 5 years, then adjusts every year after that.
The new rate is based on the Constant Maturity Treasury (CMT) index, plus a margin set by the lender—usually up to 2%.
Rate Adjustment Limits (Caps)
To help protect you from large increases, VA ARMs have built-in limits on how much your rate can change:
- Initial Adjustment Cap: 1% (for 1/1 ARMs) or 2% (for 3/1 and 5/1 ARMs)
- Annual Adjustment Cap: 1% per year
- Lifetime Cap: Your rate cannot rise more than 5% above your starting rate
These caps help reduce the risk of sudden and unaffordable increases.
Who Qualifies for a VA ARM?
To apply for a VA ARM, you’ll need to meet standard VA loan eligibility requirements, including:
- A Certificate of Eligibility (COE)
- A minimum credit score (typically 620 or higher)
- A debt-to-income (DTI) ratio of 41% or lower
- Sufficient residual income based on your family size and location
Who Might Benefit From a VA ARM?
A VA ARM could be a good fit for borrowers who:
- Plan to move or refinance within a few years (e.g., due to PCS orders)
- Expect income to increase in the near future
- Want to lower their initial monthly payments compared to a fixed-rate loan
Because VA ARMs offer a lower starting interest rate, they can be helpful for managing costs early in homeownership.
Advantages of VA ARMs
- Lower initial interest rates than fixed-rate VA loans
- No down payment required in most cases
- No private mortgage insurance (PMI)
- Funding fee can be rolled into the loan
- Backed by the Department of Veterans Affairs, which adds protection for borrowers
Things to Consider
VA ARMs are not for everyone. If you plan to stay in your home long-term or prefer predictable payments, a fixed-rate VA loan may be a better option. However, for borrowers with short-term plans or financial flexibility, a VA ARM offers a practical way to reduce upfront housing costs.
VA loans offer flexible options beyond fixed rates. Ask us if a VA ARM could help you lower your monthly payments and support your financial goals.