Hybrid ARM

Hybrid ARM

Meaning:
· In Hybrid ARM the interest rate remains unchanged for a certain number of years, and thereafter it starts to rise in step with the market interest rate up to a limit (rate cap) set in the mortgage agreement. Often the interest rate in a hybrid ARM is substantially lower than in the other types because the interest rate risk is shared between the lender and the borrower. It is considered more suitable for those who plan to sell their house between five to seven years.
· Hybrid ARM blends the characteristics of a fixed-rate mortgage and an adjustable-rate mortgage. This type of mortgage will have an initial fixed interest rate period followed by an adjustable rate period. After the fixed interest rate period expires, the interest rate starts to adjust based on an index(This is the market derived interest rate which is used as a base to set future rates of the ARM mortgage loan) plus a margin. The date at which the mortgage changes from the fixed rate to the adjustable rate is referred to as the reset date.
· Hybrid ARMs feature a fixed interest rate for a period of years -- commonly 3, 5, 7 or 10 years -- before they turn into a traditional one-year ARM for the remainder of a 30-year term.
· Most Hybrid ARMs have an additional layer of interest-rate limiter, called the "first adjustment cap", which applies only after the fixed-rate period of the Hybrid comes to an end. Thereafter, typical "periodic" caps will apply. However, that first adjustment cap may provide little or virtually no protection against a hostile rate environment.
· A hybrid ARM is ideal for individuals who plan to sell their homes within 7 to 10 years, because they can benefit from the low initial payments and dump the loan before its higher period begins.
· It is also known as Fixed Period ARMs or Delayed First-Adjustment ARMs
· Advantage
In Initial fixed period borrower can enjoy the less interest rate which is less than the interest rate with a fixed-rate loan .
· Disadvantage
The interest rate can increase over time and cause a mortgage payment to go up.
· Example:
On a loan of $300,000. Let’s say the current mortgage is fixed at 5.8%, which means the monthly payments are about $1760. If borrower refinanced into a 5-year hybrid ARM with an initial fixed rate of 5.05%, the mortgage payments would be reduced by about $140 per month. at the end of 5 years hybrid ARM, saving will be $8,400 over fixed mortgage with 5.8 interest rate!