Definition of Adjustable Rate Mortgage

Public Law 108-454 gives VA authority to guarantee “traditional” Adjustable Rate Mortgages (ARMs) in a manner similar to HUD’s Adjustable Rate Mortgages under section 251 of the National Housing Act.  VA previously had this authority but it expired September 30, 1995 .  The legislation provides authority through September 30, 2008 . 

An ARM loan offers more flexible interest rates based on negotiated initial fixed interest rates coupled with periodic adjustments to the interest rate over time.  Hybrid ARMs have longer initial fixed rates of three, five, seven, or ten years while a “traditional” ARM allows for an annual adjustment after 1 year.

Interest Rate Adjustments

Traditional ARMs

Interest rate adjustments occur on an annual basis.  The annual interest rate adjustments are limited to a maximum increase or decrease of 1 percentage point.  Additionally, interest rate increases are limited to a maximum of 5 percentage points over the life of the loan.

Hybrid ARMs

If the initial contract interest rate remains fixed for less than five years, the initial adjustment is limited to a maximum increase or decrease of 1 percentage point and the interest rate increase over the life of the loan is limited to 5 percentage points. 

If the initial contract interest rate remains fixed for five years or more, the initial adjustment will be limited to a maximum increase or decrease of 2 percentage points and the interest rate increase over the life of the loan will be limited to 6 percentage points.

Note: After the initial interest rate adjustment, annual adjustments may be up to 2 percentage points.