Hybrid ARMs

A hybrid loan, or fixed-period ARM, combines features of both a fixed-rate and an adjustable-rate mortgage. These loans start with a fixed interest rate that’s usually for a certain length of time (usually 3, 5, 7 or 10 years). Then, when the loan converts to an ARM it will have an interest rate that is adjustable for up to the closing date of the loan. An example would be a 30-year hybrid loan with a fixed rate for seven years, followed by an adjustable rate for 23 years.

Fixed-term mortgages allow lower interest rates than traditional 30-year mortgages. This means that you can save money on your mortgage while having a period of stability for your payments. ARMs, on the other hand, have a starting rate that’s considerably lower than a traditional mortgage, but carry the risk of future hikes.

Homeowners can get a hybrid mortgage and hope to refinance as the initial term expires. These types of loans are best for people who don’t plan to live in their homes for more than 10 years, since these types of loans have a lower monthly payment. By getting a lower rate and paying off this type of loan more quickly than with a 30 or 15 year loan, homeowners can save thousands during the time they have the loan.