Why do they call it a hybrid arm?

Combining the features of an adjustable-rate mortgage (ARM) with a fixed-rate mortgage creates an adjustable-rate hybrid mortgage, also known as a hybrid ARM or “fixed-period ARM”. The initial period with a fixed interest rate will be followed by an adjustable rate period in this type of mortgage. Mortgage holders are protected by an upper limit, or maximum interest rate, that can be reset annually. ARMs usually start at more attractive rates than fixed-rate mortgages, which compensates the borrower for the risk of future interest rate fluctuations.

ARM hybrid mortgages, also called fixed-period ARMs, combine features of fixed-rate and adjustable-rate mortgages. A hybrid loan starts with a fixed interest rate over a period of years (usually 3, 5, 7, or 7 years). The loan is then converted into an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.

If you're expecting a raise or a 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. In short, a hybrid mortgage combines the features of a fixed-rate mortgage and an adjustable-rate mortgage (ARM). For hybrid mortgage loans of five years or more, the initial adjustment limit is 2 percentage points up or down, and the lifetime adjustment limit is 6 percentage points. This lower rate generally means a lower monthly payment, making the ARM hybrid loan more affordable for the first few years.

With a hybrid ARM, the index is set as a reference interest to which the margin is added and thus calculate the new rate that will be enacted once the reinstatement date has been reached. Long-term fixed-rate mortgages, especially those with a 30-year period, may have low interest rates that are competitive. Hybrid branches offer homebuyers options that may be more suited to their needs. An adjustable-rate hybrid mortgage is basically a fixed period in which the interest rate and payments are fixed until a pre-established term that you agree upon when you apply for the loan.

With today's adjustable-rate hybrid mortgages, the rate is almost as likely to fall as it is to rise after the adjustment period. 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. The appeal of an adjustable-rate hybrid mortgage is that it can generally set a lower interest rate than a 30-year fixed mortgage. An index is the variable reference rate used by lenders to determine the interest rate on a hybrid ARM loan.

If you're preparing 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. If you're buying your first home, a hybrid ARM is an excellent option to keep your payments low for the first few years until you build up equity or advance your career and start earning more money. An adjustable-rate hybrid mortgage, or hybrid ARM (also known as a fixed-period ARM), combines the features of a fixed-rate mortgage with an adjustable-rate mortgage. The initial interest rate is a characteristic of hybrid ARMs (which is what most people think of when they hear the term ARM loan), in which the interest rate remains constant until the date of the first reinstatement.

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Perry Binienda
Perry Binienda

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