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The hybrid mortgage should properly be termed the specially bred mortgage – for those who don’t like the uncertainty of an adjustable rate mortgage (ARM) but can’t resist the initial low interest rates of an ARM; and who want to maximize their borrowing beyond what a traditional fixed rate loan will allow. A hybrid mortgage has two stages. The first stage is a period of time when the payment is set with a low interest rate – often a percentage point or more below what’s available for a thirty year fixed rate. These periods of time are usually three, five, seven or ten years. At the end of that period, the loan converts to an ARM at an initial rate set by the terms of the loan and floats with the interest rate as all ARMs do.
Both Sides of the Hybrid Loan
Obviously, when the honeymoon ends – even if it’s a ten year honeymoon – the new mortgage payment figure may be a very unpleasant surprise if interest rates have jumped considerably. And they will, they always do. Just over ten years ago in 1995, fixed rate loans were on the market at a 9% interest rate. It’s conceivable that you could get into a hybrid note at around 5% today and in five or seven years have your interest rate double.
Interest rates today are at very low rates and there are some fixed loan rates on the market that people would have jumped at a few years ago. Many new borrowers are opting for hybrid loans, however, for the reason that you can stretch your borrowing power a bit further initially and buy more house. That’s not the most cautious way to go about making a thirty year financial commitment. While the option is always there to refinance a hybrid loan when the honeymoon is about to end, many hybrid loans have penalties for early termination.
The Best Candidates for Hybrid Mortgages
These loans best serve people who are only planning to be in the home for five to seven years. That is the optimum way to take advantage of a hybrid – and the reason why it’s important that the loan have no early severance penalties. Real estate investors are drawn to these loans with the idea that the home is not a thirty year investment. If you’re a home buyer, you can take the same approach and bet that you’ll be in a position to move in conjunction with the termination of the loan’s fixed rate phase. That is more than an investment assumption however; there are family issues such as job location, schools and children to consider.
For the home buyer –as opposed to the investor – a hybrid works if you’re mobile and you are relatively secure financially. Financial security in this case means some sort of cushion in the savings account and a level of comfort regarding the family income over the next ten years. It always helps when there are two incomes in the household; if disability overtakes one party or the other the budget doesn’t necessarily crumble. During your loan search, keep in mind that it is easier to get into most loans than get out of them. In the case of hybrids, the lender has designed a package that rewards you on the front end. Make sure you won’t be paying too steep a price if you exit the loan early.
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