Driving a Hybrid…Mortgage

Written by Posted On Monday, 01 February 2021 00:00

Yes, a hybrid mortgage is really a thing. For those not familiar with the term as it relates to the mortgage industry, a hybrid is so-called because it’s a type of mortgage that is both a little bit of an adjustable rate mortgage, or ARM, and a fixed rate loan. A fixed rate loan is fairly straightforward. It’s a loan where the interest rate never changes throughout the life of the loan. It’s a good choice for those who think interest rates in general are pretty good now (they are) and want to lock in that rate and keep it there.

The only decisions about a fixed rate is how long the loan term will be and the individual rate itself. Each mortgage program offers varying loan terms ranging from 10 years to 30 and sometimes 40 years for portfolio type products. It’s also a good loan for those who want to watch out for other things other than what their interest rate might be in the future in the instance of an ARM.

An ARM as the name implies can and will adjust at some point in the future, but only under very specific guidelines. An ARM has an index, a margin and caps. The index can be anything the lender wants it to be but in reality most indexes are based upon industry acceptable standards. Most ARMs use the Constant Maturity Treasury, or CMT, with different maturities as a choice. What’s the attraction for an ARM?

ARMs can start out with interest rates below what current fixed rates are offering. However, with an ARM, that low rate can change in the future and actually be higher than what the prevailing fixed rates were at the time the original loan was taken out.

The margin is the amount added to the index to arrive at the rate lenders use to calculate monthly payments. If the index were 1.00 and the margin 2.50 the rate would be 3.50% until the next adjustment. Adjustments can take place in six or twelve month increments. Approaching the adjustment period, lenders will refer to the current index price and then add the margin built into the program. But what if the index zooms to 10.00? This where caps come into play. Caps limit how much the final rate can adjust at each adjustment period as well as how high the rate can ever be.

But there’s a ‘tweener. It’s a hybrid.

A hybrid is in reality an ARM, but the rate is fixed for an initial period of time before completely morphing into a fully fledged ARM. A common initial fixed term might be 5 or 7 years. The attraction with a hybrid is the initial rate can still be lower than prevailing fixed rates but does not start its annual adjustment until after the end of the initial fixed rate term. For those who plan on owning a home for a shorter period of time, say 5 or 7 years, then a hybrid might be an ideal choice. Speak with your loan officer about your options and if a shorter term stay is in your plans, a hybrid just might be in your future.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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