Hybrid mortgages have characteristics of both fixed rate and adjustable rate mortgages. The initial fixed rate term can vary from two years to ten years and the amortization term is typically 30 years making the remaining loan term an adjustable rate mortgage. The index for the adjustable portion of the loan can be MTA, Libor or any other floating rate index that is commonly used in the adjustable market. During the adjustable rate portion of the mortgage, each loan has periodic adjustments as well as both periodic and lifetime interest rate caps attached, which makes it look like any other adjustable rate mortgage. Although there are many possible permutations, most hybrid loans have cap structures that limit the initial periodic loan adjustment.
Hybrid mortgages are a smart choice for those planning to stay in their homes for no longer than the fixed rate period of the mortgage. Hybrids offer somewhat lower initial interest rates than their fixed rate counterparts.
FHA and VA loans can come in Hybrid Arm forms.
The initial rate on a Hybrid Mortgage is still amortized over 30 years in most cases. Unless you opt for an interest only Hybrid and that is calculated from simple interest.
The interest rate for the initial fixed rate period in a Hybrid Loans is usually lower than that of a 30-year fixed rate mortgage. As a rule of thumb, the shorter the fixed period, the lower the interest rate. Therefore, for a homeowner who has no intention of keeping the mortgage for more than 5 years, it may be wise for him to get a 5/25 Hybrid Mortgage than a 30-year fixed rate loan if the interest rate on the initial 5 years is lower than that of the 30 years fixed. A 5/25 Hybrid Home Loan is a mortgage with a fixed interest rate for the first 5 years of the loan and an adjustable rate for the remaining 25 years.
Hybrid loans have many purposes. If you do not plan on living in the property for very long then it doesn't make sense to pay a higher rate for a long term loan. Also if you have an investment property and plan on cashing out of it soon then a hybrid loan would make much more sense than a 30 year or even a 15 year fixed.
Lets look at an example $360,000 mortgage. The interest rate you're quoted on a 30-year fixed loan is 7 percent, with a monthly payment of approximately $2,395. If you switch to a mortgage that's fixed for 10 years and then becomes adjustable (called a 10-year fixed-period ARM), your interest rate might be only 6.5 percent. The monthly payment on a $360,000 mortgage at 6.5 percent would be approximately $2,275-about $120 less per month than the 30-year fixed-rate loan. SAVING $1,440 a year or $14,400 for the term of first portion of the note. Contact a Mortgage Professional if this product is good for your family.