What’s a Hybrid Loan and How It’s Different Than a 30-Year Fixed Loan

Two common mortgage types that you’ve probably heard of are a fixed-rate and an adjustable-rate mortgage. A fixed-rate mortgage has a set rate for the whole life of the loan while an adjustable-rate mortgage, or ARM loan, usually begins with a lower rate than adjusts to a fixed-rate.

Since rates are dependant on the current market, one can’t predict what the rate will be once it’s time for the rate to adjust. So while attractive with its low payment, the new fixed-rate of your ARM loan may be higher than you expect.

About a hybrid mortgage.

A hybrid mortgage is a class of ARM loan. Just like an ARM loan, it has a fixed rate for a set time after which it changes. However, instead of it adjusting once and set for the loan term, the hybrid ARM can adjust monthly, quarterly, yearly, or every few years.

You’ll often see hybrid mortgages listed like this —

  • 3/1
  • 5/1
  • 7/1
  • 10/1

The first number (3, 5, 7, 10) refers to the number of years rate is fixed and the second number tells you how often you can expect the interest rate change after the fixed period ends. So in the examples above, the “1” after the slash means the rate will change once a year.

Your hybrid loan may be expressed differently so it’s important to ask questions when considering this type of loan. Understand that there is a level of risk, even with this type of ARM loan. We can’t say with absolute certainty which way your rate will change during the adjustable-rate period – it could go up or it could go down.

You can, however, check the index (the same one we use) and pay attention to economic conditions as this could help you get a sense of how your rate will change.

Interest rate and payment caps.

We don’t throw caution to the wind, leaving you stuck with a rate and payment that’s extreme. Your loan term will include multiple rate cap conditions that are meant to protect you from extremes. For example, your hybrid mortgage may even include additional caps during the first adjustment. Or a cap placed at each adjustment period. Or there can be a lifetime rate cap that limits how many “percentage” points your rate can increase.

Your monthly payments may also restrictions. But we’ll need to discuss this further as there may be situations that your payment isn’t enough to cover the interest due and you could end up owing more than your loan amount.

Benefits of a hybrid mortgage.

Hybrid mortgages usually have a lower starting interest rate than standard 30-year mortgages. This often translates to a lower mortgage payment and upfront savings. Use this savings to buy furnishings, make home improvements, or even to decorate. Since hybrid loans are adjustable, your rate may be lower than it was initially, leading to long-term savings.

There are so many factors to consider when choosing a home loan, and we can help make sense of it all. Give us a call today or start your application online and start getting the answers you need to all your home questions. We look forward to serving you!

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