A hybrid adjustable-rate mortgage, often called a hybrid ARM or fixed-period ARM, combines features of both fixed-rate and adjustable-rate mortgages. It starts with a fixed interest rate for a set period, after which it switches to an adjustable rate. Once the fixed-rate period ends, the interest rate changes based on a specific index plus a margin. The point when the mortgage transitions from the fixed rate to the adjustable rate is known as the reset date.
The most popular type of hybrid ARM is the 5/1, which offers a fixed rate for the first 5 years, followed by adjustable rates that change every year.
Understand about Hybrid ARM
A standard fixed-rate mortgage keeps the same interest rate throughout the entire loan term, which can be either 15 or 30 years. On the other hand, an adjustable-rate mortgage (ARM) features a fluctuating interest rate that changes at set intervals, meaning the new rate could be higher than what you started with.
A hybrid ARM combines elements of both fixed and adjustable-rate mortgages. It offers a fixed interest rate for a specific time frame, like three, five, or seven years, before switching to an adjustable rate that changes annually. Once the initial fixed-rate period is over, the loan transitions to an ARM, where the interest rate adjusts periodically based on a specific index or benchmark.
Risk of Hybrid ARM
If the borrower is unable to handle the new rate after the reset, they might end up missing payments. Additionally, if they intend to sell the house after the reset and the property’s value has dropped, they could face a loss if the sale price is lower than what they owe on the mortgage.
Conclusion
Hybrid adjustable-rate mortgages (ARMs) start with a fixed interest rate for a specific introductory period, typically lasting a few years. After this initial phase, the interest rate adjusts each year based on market conditions or a specific benchmark. This means that the new rate can end up being much higher than the original fixed rate.
One of the main advantages for borrowers is the lower monthly payments during the introductory phase. On the flip side, the reset feature of a hybrid ARM can result in a significantly increased interest rate after the initial period. Because of this, many borrowers look to refinance their mortgage to avoid facing a higher rate once the reset occurs.