So you received a flyer in the mail with a VA ARM loan offer on your VA home mortgage loan at 1.75%, but you are a bit lost because you through you already had a great fixed rate of 3.25% on your VA home mortgage loan, which is among the lowest fixed rates in our nation’s history.
So what's the catch?
I have been a VA home mortgage loan expert for over ten years, and I have seen quite a bit in my experience in this profession. One thing that I believe and know to be true beyond a shadow of doubt is that VA ARM loans are the biggest money grab for lenders that exist.
The reason is because VA ARM loans are not only expensive, but also only beneficial for the short term. The Federal Reserve already decided to pull the trigger with 3 rate hikes for this year alone. This occurred March 15th following the initial rate hike Dec. 15th 2016. To show you just how much the market has shifted, compare the ten year treasury NOTE that you can find on CNBC.com from just a few years ago.
When the subprime market crashed, we saw unbelievably low yields on all treasury bonds. This occurred due to the FED initiating Quantitative Easing. This is a stimulus program initiated by the federal reserve and the Obama administration. It was designed to artificially taper interest rates by purchasing billions of dollars in mortgage bonds and notes.
Notice the difference from VA Home Mortgage loan interest rates prior to 2010 ranging from 5%-6.5%. Enter the crash era (2008-2010), with the aid of the Federal Reserve, we saw rates drop to the low 4% range.
When they initiated phase 2 of the QE program, the Federal Reserve was literally purchasing 20-40 billion dollars worth of mortgage bonds monthly. Ultimately, VA mortgage rates then fell to the all-time historic low of 3.25%.
Since 2014, the quantitative program has been exhausted as the FED (based on job reports and economic growth) finally decided that the US economy reached a point of recovery that will sustain a path to the normalization of rates.
Since 2014, the market has been on the rise and the FED initially was slow to make the hike adjustments.
However since then, we have already experienced 3 rate hikes: one rate hike occurred in 2015 December, then again in 2016 December and also during March of this year. Furthermore, the Federal Reserve has agreed to a minimum of 3 rate hikes before the end of this year alone.
In other words, monetary policy is shifting from quantitative easing to quantitative tightening, which you can read about here.
I have watched countless borrowers throw away a great deal on a fixed rate in exchange for a short term VA adjustable rate mortgage that will inevitably lead to another refinance shortly after obtaining.
This is, in fact, why lenders love these type of loans—they know with 100% certainty that the rate will adjust up eventually, at which point you will desperately want to switch backed to a fixed rate (likely at 5% by then).
If they did not believe this would happen, then why would they leave enough room to adjust your VA adjustable rate mortgage to a maximum of 7.5%? In other words, your rate will adjust up to 5 points from the starting rate on your VA home mortgage loan, so if your initial VA adjustable rate was 2.5%, the maximum interest can reach 7.5%.
Again, the simple logic behind this is that they are aware that your rate can adjust that high, otherwise they would change the maximum rate to 5% to make it easier to sell.
To sum it up: it simply does not make financial sense to take an expensive adjustable rate on your VA home mortgage loan, only to spend more money later doing a second refinance at an ever higher rate than the historic low rate you have locked in right now.
If you'd like to speak to me directly, I can be reached at 855-VA-Loan-0 or 855-606-5626 ext 700!
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