The Good, the Bad, and the Ugly of the Hybrid Home Loan

By Kelly Richardson
LoanPage.com Columnist

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In an effort to make the new home loan more affordable for homeowners, the industry has begun extending the mortgage amortization period. The traditional roof of this period has been the 30-year home loan. Now, 40- and 50-year hybrid loans are becoming common mortgage products. But there are some drawbacks.

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Mortgage lenders operate under the business axiom that it is much cheaper to keep their existing customers than to acquire new ones. As the real estate market begins a cooling-off period, lenders are expanding their loan options for current borrowers to increase their cash flow. Enter the hybrid loan. 40- and 50-year mortgages are basically hybrid loans in spirit. Hybrid loans are a combination of fixed- and adjustable-rate mortgages that usually make the respective transformation after a seven-year period. The basic idea behind this arrangement is that by stringing out the amortization over a longer period of time, the monthly payments will be lower. The hybrid loan holds some unique benefits for borrowers that you should be aware of.

Characteristics of Hybrid Home Loans

  • » More Homeowners Qualify. Due to the lower monthly payments of 40- and 50-year hybrid loans, a greater slice of customers can be included in the program that were unable to qualify under traditional loans.
  • » Building Equity. Because hybrid loans take a longer time to amortize, homeowners have the chance to build limited equity in their properties.
  • » ARM Procrastination. Lenders expect the loans to be popular with homeowners who are concerned about fast-moving adjustable rates.
The downside to the hybrid loan, and any type of specialized loan option, is that theres always a catch. Before you run off to your banking institution with hybrid loan fever, you need to know how these loans can play out in a worst-case scenario.

Beware of these Hybrid Loan Drawbacks

  • » Higher Risk. The longer the loan type, the more opportunity there is to default. In many cases, the fixed-rate turns adjustable before the owner can build up enough equity in the property.
  • » Limited Savings. The upfront costs of obtaining a hybrid loan are not that appealing. The loan should only be utilized to qualify for a mortgage that the homeowner might not otherwise be eligible for.
As with any loan, you should gauge your current financial situation and needs. Talk with your lender and let them explain the hybrid home loan in full before you make a decision.

Sources:
Adjustable rate mortgage (ARM), U.S. Department of Housing and Urban Development
The 50 Year Mortgage Is Introduced In California, Mortgage News Daily

About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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