Hybrid Adjustable Rate Mortgage

When shopping around for a home loan, many borrowers are torn when choosing between the two most popular loan options: Fixed rate and adjustable rate mortgages. Both offer unique advantages, as well as potential drawbacks. However, a particular type of adjustable rate mortgage may solve this dilemma and allow borrowers to reap the rewards of both types of mortgages at once. It is known as a hybrid ARM because it offers a combination of fixed and adjustable rate features.

How Hybrid ARMs Work

A hybrid adjustable rate mortgage gets its name because of the way interest is charged on the loan. At the beginning of the loan, the interest remains fixed and unchanging. Then, after a set period of time, the interest resets to follow an index as an ARM would.

Unlike a traditional adjustable rate mortgage, which offers a low fixed rate (the “teaser” rate) for a short period of time at the beginning of the loan, a hybrid ARM extends that fixed interest rate for a much longer period of time. This term length will vary from policy to policy but typically ranges from three to ten years. After that time passes, the load rate will adjust and act as a traditional ARM for the remainder of the loan term.

Why Choose a Hybrid?

Many people find that once their adjustable rate mortgage resets after the fixed rate period, interest payments become too expensive to carry out the remainder of their loan. In this case, it is possible to convert an ARM to a fixed rate mortgage.

However, obtaining a hybrid ARM instead allows the borrower to pay a low, fixed interest rate over a longer period of time, thus lowering the total amount of interest paid over the life of the loan and lessening the chance that an ARM conversion is needed.

Keep in mind the hybrid ARM is not the only kind of adjustable rate mortgage available and is not necessarily the best–it is one of many choices. To determine if a hybrid ARM is the best home loan option for you, compare it against other mortgage types and speak with a trusted professional regarding your needs and concerns.