If you're a veteran looking to buy a home in Montgomery County, you've probably noticed two things pretty quickly:
Homes aren't cheap, and mortgage rates aren't exactly giving anything away.
With home prices in Montgomery County still hovering around the mid-$600,000s, the monthly payment has become a huge part of the conversation for buyers. And that's where I get asked a lot of questions about different mortgage options, including VA Adjustable-Rate Mortgages, or ARMs.
So let's talk about it in plain English.
A VA ARM is a mortgage that starts with a fixed interest rate for a certain period of time and then has the ability to adjust later.
The important part is understanding how much it can adjust.
For example, with a 1/1/5 ARM, the rate can move by no more than 1 percentage point at an adjustment, and the rate can't increase more than 5 percentage points over the life of the loan. Those limits are part of the VA's ARM guidelines.
There is also something called a margin. In the example we're looking at, that's 1.75%. When the loan adjusts, the new rate is determined by adding that margin to the applicable index.
So if the index were 4.00%, you would start with:
4.00% + 1.75% = 5.75%
Obviously, there are more details involved, but that's the basic idea.
This is where my answer is going to sound very mortgage-broker-ish:
It depends.
There isn't one mortgage that is automatically right for everybody.
For some Montgomery County buyers, a VA ARM could make a lot of sense if the initial rate and payment are meaningfully lower than their other options.
Think about a buyer purchasing a home in Gaithersburg, Germantown, Rockville, Damascus, Silver Spring or one of the surrounding communities. If they're planning to stay in the home for a shorter period of time, or they believe they'll refinance before the adjustment period becomes an issue, the lower initial payment could be worth considering.
But—and this is a big but—you need to be comfortable with the possibility that the rate could increase later.
That's the part I don't want anyone to gloss over.
This is why I don't like simply telling people, "VA is the best" or "Fixed is the best" or "ARM is the best."
Your mortgage should fit your situation, not the other way around.
If you're buying your forever home in Bethesda and plan on staying there for 20 or 30 years, I'd probably look at the long-term numbers very differently than I would for someone buying a starter home in Germantown who expects to move in five or seven years.
And if you're buying because you found the right house in Rockville but the payment is just a little too high, we should look at every legitimate option available to you before you decide you can't afford the house.
That's where having someone actually look at the numbers can make a big difference.
This is probably the biggest thing I tell buyers.
Don't pick a mortgage simply because someone advertised the lowest rate.
Look at the payment, closing costs, how long you expect to own the home, how the rate can change, and what happens if you still have the loan when that adjustment occurs.
Then compare that to a traditional fixed-rate VA loan.
Sometimes the fixed loan wins.
Sometimes the ARM makes more sense.
Sometimes there are other options we haven't even talked about yet.
And that's exactly why I like having the conversation before you're out shopping for houses.
The Montgomery County market isn't exactly a bargain market. But it also isn't the same market we saw when buyers were routinely competing against a dozen other offers on every house.
Recent market data shows the county has had more inventory and somewhat more breathing room for buyers, although desirable homes can still attract plenty of competition.
There are also local programs that may help qualified buyers with down payment and closing costs. For example, Montgomery County's Homeownership Assistance Fund has recently offered up to $25,000 in assistance for eligible buyers, while the Maryland Mortgage Program's Montgomery Homeownership Program has offered up to $50,000 in deferred down-payment assistance.
So before you assume, "I can't buy in Montgomery County," let's actually run the numbers.
Don't start with the mortgage.
Start with what you want your life to look like.
How long do you think you'll be in the house? What monthly payment are you comfortable with? How much cash do you want to keep in the bank after closing? Are you a veteran who qualifies for VA financing? Are there assistance programs you qualify for?
Then we work backward and figure out which mortgage makes the most sense.
That's what I do.
My job isn't to put you into an ARM because it's an ARM, or a fixed loan because it's a fixed loan.
My job is to look at your situation, explain your options, and help you make a decision that you're comfortable with.
Because at the end of the day, the "best" mortgage isn't the one with the fanciest name or the lowest advertised rate.
It's the one that makes the most sense for you.
If you're a veteran thinking about buying in Montgomery County, I'd be happy to run the numbers on a VA fixed loan versus a VA ARM and show you exactly what the difference looks like. Sometimes seeing the numbers side by side makes the decision a whole lot easier.
