What is a Hybrid Loan?

by Marianne Salina
Loan Page Columnist

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In recent years, mortgage rates have reached extreme lows, causing many to consider refinancing for a loan with lower interest rates. Even with these lows, however, you may have heard of a hybrid loan, which is a combination between a fixed rate and adjustable-rate mortgage. With this hybrid or "two step" loan, you can enter into your agreement with an even lower fixed ratemaking this type of mortgage extremely attractive. Hybrid loans begin with extremely low fixed mortgage rates, giving you minimum interest on your monthly payments for about five to seven years. After this specified time, your loan changes to an adjustable rate mortgage, changing your mortgage rates to the current market interest rates.

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Should you consider a Hybrid?

Due to recent low interest mortgage rates, a hybrid mortgage looks great in the beginning since the fixed rate portion is even lower than other mortgages. It is important to understand, however, that the adjustable-rate portion of the mortgage is likely going to raise your monthly interest as the market rates eventually go up. In order to prevent an unruly jump in your adjustable mortgage rate, you can opt for a loan with an interest cap.

Refinancing your Hybrid Loan

Some people sign on to hybrid loans if they plan to move before the adjustable-rate kicks in, or if they intend on refinancing their mortgage at a lower rate for the second phase. Whether you choose to take this "two-step" approach or go with a more standard fixed mortgage, make sure you research the terms before you sign.

Sources:

Hybrid Loans Offer Up-Front Discounts, by David Reed, 30 September 2001 RealtyTimes
Homeowners Urged Caution on Hybrid Loans, By The Associated Press 13 April 2003, Eco Realty

About the Author

Marianne Salina is a freelance writer and columnist in Spokane, Washington. She graduated with honors upon receiving her B.A. in Literature/Creative Writing from UC Santa Cruz. Her varied coursework in critical theory and Womens Studies is an undercurrent within her fiction, and her careful study of educational programs is reflected in her column.

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