Different industries share common industry jargon and the mortgage business is no different. Balloons, non-owner and investment properties just to name a few. On a daily basis, loan officers use various terms regularly.
So much so that many times a loan officer will begin to use these terms when speaking directly with a borrower. The problem is, that while the loan officer knows exactly what the terms are the borrower typically has no clue. One of these terms we'll talk about today is the word 'hybrid.' What's a hybrid loan and moreover how do they work?
A hybrid anything is a cross between two or more one feature and another. With mortgage loans, the hybrid loan is so-called because it acts like an adjustable rate mortgage, or ARM as well as a fixed rate loan. How does that work?
Most hybrids start out like a fixed rate loan for a fixed period. After the period expires, it turns into an ARM. And here's a bit more industry jargon: 5/1 or 7/1. A 5/6 may also be an option. What do these mean? They mean that the rate is fixed for five or seven years before turning into a loan that can adjust once per year. That's the "1" and the "6" part. Why would anyone take out such a loan?
The hybrid loan start rate for say the initial five year period is going to be lower than comparable fixed rate programs. Not by a lot but lower nonetheless. This program can be an answer for those who don't plan on owning the property but for a shorter period of time. Maybe someone is buying a property near a college campus for their kid and hopefully the kid will graduate before that five or seven year term. That's the plan, anyway. When current fixed rates are at or near historic lows, it might make sense to take a harder look at a fixed rate program in lieu of a hybrid.
Yet if a homebuyer is pretty firm on how long they intend to hold onto the property, then a longer term fixed rate is probably the better option. But if they're also just as firm as knowing they'll only keep the property for a relatively shorter period of time. If you're thinking of financing for the short term yet appreciate the peace of mind a fixed rate term can offer, then a hybrid should be given a closer look.