The competition from the VA product could be significant because mortgages made through the agency's program do not require a down payment or private mortgage insurance, Springsteen said. Their appraisals do not stop at the value of the properties but also include inspections into their safety, soundness and sanitation. Approved VA loan recipients will also receive assistance should they fall into dire financial straits.

The downside of the VA loan includes a funding fee, which runs about 2% and complicated eligibility requirements and limits. For example, on a $150,000 loan a 2% funding fee is $3,000, which the borrower can finance but still has to meet somehow.

Staff time and other resources required to track and underwrite VA loans were among the reasons Fort Knox FCU decided to outsource that business, Springsteen explained.

“We periodically take another look at it and review the decision, but so far, we haven't headed in that direction,” he said.

In order to compete with the VA loan, Fort Knox FCU allowed borrowers to finance 100% of the home price in their adjustable loans without requiring mortgage insurance. The credit union will also finance closing costs in the loan. By contrast, the cooperative will only finance up to 80% of the home's value through its 30-year fixed rate product and expects to charge closing costs.

Springsteen said the ARMs also have to overcome the stigma of being an adjustable rate product.

“People have such negative ideas, many of them that they haven't really thought through, about adjustable rates loans,” he said. “Our first task was to sit down with our loan officers and explain the math to show them how these loans can leave members far better off financially after 10 years than would a fixed rate loan.”

The key, he suggested, is to look at ARMs across their lives and to evaluate them in that context. Data from the NCUA underlined how that formula has helped grow loans.

According to Fort Knox FCU's NCUA December 2009 Call Report, it had 41 ARMs on its books that totaled $3.51 million and 16 originations that year. By the end of 2013, the credit union posted 108 ARMs that totaled $15.1 million and 29 originations. In addition, as of June 2014, the financial institution posted 149 loans valued at $20.7 million, with 44 originations so far this year. At the end of June, Fort Know FCU posted income of $8.67 million with a delinquent loan ratio beneath its peer group and a return on average assets of 1.52%.

Lending activity has been steady for the credit union that was charted in 1950 by 10 civilian base employees with $1,000 in pooled capital as Fort Knox Civilian Employees Federal Credit Union to serve fellow civilian workers. In 1960, it broadened its charter to include service personnel and dropped the words “civilian employees.”

Son Nguyen, co-founder and president of the Veterans Association of Real Estate Professionals,urged credit unions and other lenders to act completely in the best interest of their military borrowers. The association would want more information about credit unions' work with military borrowers, he added.

“If there are institutions out there putting veterans in quality home loans, I say great, more power to them, go for it,” Nguyen said. “But what we have often found is that institutions will put veterans in loans that are good for the institutions and not as good for the veteran.”

VAREP encouraged lenders offering VA and other loans to put their respective qualities on paper in front of borrowers, so they can easily compare them and make informed choices. Nguyen cautioned against assuming or believing that a given alternate product will necessarily be better for veterans because each individual person's situation can be very different. He said while many veterans might be motivated to try the Fort Knox FCU ARM to avoid the VA's funding fee, a veteran with a 10% war-related disability might be exempt from the fee.

“Really, a military service member needs to speak with people who genuinely know their options to help them evaluate their choices,” Nguyen said.

He stressed that he was not accusing Fort Knox FCU of not serving its military members well, but added that he always pays extra attention when a lender claims to know what is best for veterans or military personnel as a group.

Katie Miller, vice-president of mortgage products at the $60 billion Navy Federal Credit Union in Vienna, Va., said she could imagine several scenarios that would make ARMs attractive to military borrowers. As of June 2014, the credit union booked roughly 14,000 mortgage loans, approximately half of which were VA loans, according to NCUA data and Miller. Navy Federal also offers a 100% financed, no PMI alternative loan to the VA loan.

Miller agreed that while individual borrower circumstances determine which loan works best for a military borrower, those scenarios could either favor or disfavor an ARM similar to the one offered by Fort Knox FCU. For example, since a borrower can have only one VA loan at a time and subsequent VA loans can be more expensive to originate than the first, Miller said she could imagine why a military borrower might choose an ARM.

“They might opt to not use the benefit at its least expensive until they are someplace where they could see themselves settling down,” Miller observed.

Likewise, ARM loans with a very low initial rate could be perfect for active duty military borrowers who knew they were likely to be posted somewhere else within five years, she explained.

“In that situation, an ARM with a low first rate might save the borrower a lot of money over a fixed rate loan,” Miller said.