The Hybrid Home Loan and How it Works

By Kelly Richardson Columnist

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With a housing market that is showing signs of cooling, mortgage companies are launching a host of new home loan products designed to bring in more borrowers. One of the most popular is the hybrid loan. It offers borrowers the best features of fixed and adjustable rate mortgages.

Also referred to as the delayed first adjustment ARM (adjustable rate mortgage), a hybrid loan features a fixed rate of interest for a set number of years before changing into a traditional ARM for the remaining amortization schedule. As with all types of home mortgage products, hybrid loans come with positives and negatives. Here's a rundown of the particulars of most hybrid mortgages and what you can expect.

Hybrid Loan Details

  • » The Fixed Period. Just as the name implies, a 2/1 ARM, 3/1 ARM, 5/1 ARM or 7/1 ARM has a fixed rate for two, three, five or seven years, respectively. Once this fixed period ends, the home loan will reset based on the conditions of the remaining term. You can always refinance at this point.
  • » The Adjustable Period. If you don't refinance, your mortgage will enter into its adjustable rate period. The rate will adjust at regular intervals following the fixed period and is based on the prevailing market rates.
  • » Why Choose a Hybrid? A hybrid home mortgage allows you to choose how much fixed rate and how much adjustable rate mortgage you're looking for. In general, the shorter the fixed period, the lower percentage rates you will pay. For example a 3/1 ARM has a lower start rate than a 10/1 ARM.
  • » Things to Look For. ARMs come with two caps--an adjustment cap limits how much the rate can increase with each adjustment (generally 2% per year but not always), and a life cap, which limits the maximum rate you can pay (generally 6% over the start rate but not always). Know what your payment can potentially be after the fixed rate period, and how high it could possibly go.
  • » Refinancing Option. Refinancing after the rate resets may allow you to restructure the mortgage so that it's more affordable. If you're willing to pay the closing costs and have the equity, it's an option to consider.
As with any financial arrangement, check with lenders for specific information before signing that contract. They'll be able to suggest a hybrid loan that is right for your particular financial situation.

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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