"Knock, knock."
"Who's there?"
"Holden."
"Holden, who?"
"Holden to your shorts, your house payment's about to double."

I've recently received several loan applications from people who have hybrid loans wanting to refinance out of them into fixed rate loans. And it's probably a good idea to do so, regardless of what the hybrid rate is on the current note. Especially so if you intend to keep the property for any length of time.

Hybrids, called so because they're a cross between a fixed and an ARM (actually they're an ARM, but hey, who's counting) because the rate is fixed for a predetermined period of time then after that initial period the loan changes into an annual adjustable rate mortgage.

The most common hybrid in the conventional market is the 5/1 ARM. Seems that was the "loan de jour" a few years ago when rates were sub-zero. Not exactly sub-zero, but you could sure see it from a distance. Like four percent. Four percent.

For those who nabbed these ultra-low hybrids they got a sensational deal. Hybrid ARMs were at unbelievable start rates. Sure, the rate was going to adjust after five years, but 2008 seemed so far into the future and you could always refinance, right?

And that's where we are today. People holding onto hybrids are getting nervous watching rates move up knowing they missed an opportunity late last year, but didn't bite. Now fixed rates are in the mid 6's and climbing.

A $300,000 mortgage payment at 4.00 percent is $1,432. 6.50 percent is $1,896 and 8.00 percent is $2,201. But if your hybrid rate now sits at 4.00 percent and 30 year fixed rates are now at 6.50 percent, where is the 8.00 percent coming from?

Your current hybrid note. Remember, your loan won't morph into the 6.50 percent rate available today, but at your index plus the margin contained in your current loan.

The index is most likely the 1 year Treasury or perhaps a LIBOR index of some maturity but using today's average index you're looking at right around 5.25 percent. Next you add the margin to get your new rate and again a common margin is 2.75 percent.

5.25 plus 2.75 = 8.00 percent. If you adjusted today that's what your new rate would be for the entire year until you get your annual ARM surprise again.

"But David, but David. What about my caps? Doesn't my cap protect me from going from 4.00 to 8.00 percent?"

Yes, caps protect you. Your rate cap limits how much your payment goes up at each adjustment. However, some lenders who offered ultra-low hybrid start rates also put a 5.00 percent initial cap as part of that loan, and not the more common 2.00 percent cap.

For instance, a 2 percent initial cap would limit your next note rate to 6.00 percent and not the fully indexed 8.00 percent rate. If your initial cap is 5.00 percent and not 2.00 percent then your rate would in fact go to 8.00 percent. Or as much as 9.00 percent if your index keeps going up.

Not sure what your cap is? Then it's time to open up those old loan docs and find out. It might be a very, very good time to fix your hybrid.

Published: June 29, 2007

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.