Have you considered a hybrid adjustable mortgage?

Syd Johnson

If you’re not sure if you should sign up for an adjustable rate mortgage (ARM) or a fixed rate mortgage, you’re not alone. It is very easy to get excited when thinking about your new home, and then get feel a bit deflated when it is time to start thinking about financing.

Part of the challenge for any home buyer is to reconcile the fact that the introductory rates on adjustable rate mortgages can be so low. In fact, they are often lower than the market rate, and considerably lower than the rates on fixed rate mortgages. Now, you can get an ARM and some of the benefits of a fixed rate loan with the hybrid adjustable rate mortgage.

A hybrid ARM is one where the rate is locked in for the first few years of the loan and then will go back to market rate at the end of the lock-in period. The lock in period is quoted up front and written into the adjustable rate mortgage contract. This period can vary from five years on up. Depending on your credit history, the amount of the loan, and your experience with your mortgage lender, you can negotiate lock in term as high as eight or eleven years.

This type of loan is ideal for anyone who plans to stay in their home for the first few years and then move to another place. Couples, young home owners, first time buyers and anyone who is upwardly mobile. The average
American spends about nine years in their first home. If you fit into this profile, you can get a hybrid adjustable rate mortgage, get a fixed rate for the first five to ten years and then sell the home before the rate starts to fluctuate again.

If you were to get a fixed 30-year mortgage at the same that you’re considering the hybrid, it is unlikely that you would get a fixed rate that matches the teaser rate on the ARMs in the market. To take full advantage of this type of mortgage, you must fully understand that the rate will revert to the ARM levels at some point.

This means that you can count on a rapid and drastic increase in your monthly payment once the loan goes back to a full adjustable rate basis. If you plan to stay in the home for a very long time, your savings from the locked in period will probably be wiped out when the loan reverts to its adjustable status. You can consider a refinance, but that will also take some money out of your pocket. If you decide that you don’t want to sell the property, keep in mind that overall, your loan will still be an excellent choice for your financial situation.

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