QandAs: Loans

What is a Hybrid ARM?

Answer:
A hybrid ARM or hybrid adjustable rate mortgage

is a mortgage loan that is a mixture between a conventional fixed mortgage loan and an adjustable rate mortgage loan. There are pros and cons and often hybrid ARMs were designed to favor a specific client.

Lets first quickly describe a conventional or fixed rate mortgage. A fixed rate mortgage is just as it sounds. You lock in your APR for a fixed amount of years. Conventional fixed rates usually fall in the 15-30 year range. So with a 30 year fixed mortgage loan you will pay the same amount every month for 30 years. This is a less risky and stable mortgage product.

An adjustable rate mortgage or ARM has an adjusted interest rate or APR. This means your payment could adjust periodically depending on the prime rate or APR. This is a more risky and fluctuating mortgage product. APR is usually lower for ARM's because it is less risky for the Mortgage Lender as they know they can adjust it depending on the APR or prime rate.

So now we have the basics down for what a conventional fixed rate and adjustable mortgage rate loan is we can describe what a hybrid ARM is. A hybrid ARM is a home loan that offers the best of a fixed mortgage and the riskiness of an ARM. A hybrid ARM is fixed for a period of time then it turns into an adjustable rate mortgage. Often times you will see a 3/1 ARM or 5/1 ARM. These are hybrid ARMs and for a 3/1 ARM your rate is fixed for 3 years and adjustable for 1 year. On the last day of the 3rd year (the reset date) the mortgage will be set to the adjustable rate according to the prime rate index.

Hybrid ARMs are gaining in popularity and are great options for those looking to possibly move within the fixed rate portion of the ARM. ARM interest rates are lower, so if you are only going to live in a home for 3 years then a 3/1 ARM would be a good product as you would save on your payments.


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