The “5” in the term refers to the number of years with a fixed rate, and the “1” refers to how often the rate is adjusted after that (once a year). A hybrid mortgage has a fixed interest rate over a period of time and is then adjusted periodically for the rest of the loan. Essentially, it has the features of a fixed-rate mortgage and an adjustable-rate mortgage. If you're getting ready to pay for college tuition, pay for a wedding, or finance another major life event, you may not have the cash you need if your hybrid mortgage payment increases more than expected after a rate adjustment.
All seven- and 10-year hybrid mortgages have an initial adjustment limit of 2 percentage points and a lifetime adjustment limit of 6 percentage points. With so many options, it's important to review the rates and limits of each type of conventional hybrid mortgage you're considering. The downside to hybrid mortgages is that you could have a much higher monthly payment if your interest rate adjusts upwards. With a three-year hybrid mortgage loan, the initial adjustment limit is 1 percentage point and the lifetime adjustment limit is 5 percentage points.
In short, a hybrid mortgage combines the features of a fixed-rate mortgage and an adjustable-rate mortgage (ARM). Adjustable-rate hybrid mortgages can be fixed at fixed rate intervals of three, five, seven or 10 years and the adjustable rate is activated on the reinstatement date. Similarly, a five-year hybrid has a fixed interest rate for five years and then adjusts annual interest rates for the remaining 25 years. The borrower should carefully consider their time horizon when choosing a hybrid branch and recognize the risks associated with the reinstatement date or the expiration of the fixed interest rate period.
This lower rate generally means a lower monthly payment, making the ARM hybrid loan more affordable for the first few years. If you expect a raise or salary increase before the fixed-rate period ends, a hybrid mortgage could provide you with a way to get a mortgage loan now, knowing that you'll be in a good position to make payments after the fixed-rate period ends. An index is the variable reference rate used by lenders to determine the interest rate on a hybrid ARM loan. While lenders can adjust the interest rate on their hybrid mortgage, which could affect your monthly payment, the adjustments they can make have limits.
Lenders can also set their own interest rate limits, so compare prices and compare loan estimates to get the best overall rate for your hybrid mortgage. A hybrid mortgage starts with a fixed interest rate and then adjusts based on the terms of the loan.