Hybrid ARM: Hybrid Adjustable Rate Mortgages in Home Loans
What is a Hybrid ARM?
A hybrid ARM is a mortgage that combines elements of a traditional fixed-rate mortgage and an adjustable-rate mortgage. To do this, a hybrid ARM has two parts, or stages: during the first part of the loan, the interest rate is fixed, meaning it doesn’t change. During the second part, the rate will change based on a specific market index.
What makes hybrid ARMs a good deal for customers?
In general, people like hybrid ARMs because they offer them the best of both worlds -- a chance to get a mortgage starting at a low-interest rate (like an ARM), with the security of a multiyear fixed-rate period to start out with.
How often are the interest rates adjusted on hybrid ARMs?
That depends. In general, ARMs have either 1-year or 6-month adjustment periods. For example, 3/1, 5/1, and 7/1 ARMs all have an adjustment period of one year. In comparison, 3/6 and 7/6 ARMs both have 6-month adjustment periods, meaning you could see your interest rates hiked every 6 months during the adjustable period of the loan.
What are the risks of a hybrid ARM?
Like with any ARM, the main risk is that interest rates can increase faster than you might think -- and that could leave you with mortgage payments you might not be able to handle. That’s why many people who decide to get a hybrid ARM do so with the specific intention of selling or refinancing their home at the end of the fixed-rate period. That way, they’ll never have to worry about dealing with the adjustable rate part of the mortgage.
While the adjustable-rate part of the mortgage can lead to higher mortgage payments, you might be relieved to know that your mortgage can’t increase infinitely. The reason? Hybrid ARMs have caps that limit how much (and how fast) your interest rates can increase.
For example, if your initial rate for the fixed-interest part of the loan was 4%, you might have a lifetime cap of 4%. That means your interest rate can never increase more than 4% above your initial rate.
But, even if rates were to jump 4% in a year, your interest rate probably wouldn’t. That’s because hybrid ARMs also have what’s called a periodic rate cap, which limits how much your interest rate can be increased each time the rate is adjusted.
Can I save money on the adjustable-rate part of a hybrid ARM if interest rates fall?
Theoretically, yes. If the market index rate on which your hybrid ARM is calculated falls, you could actually be left with a lower interest rate than you had on the fixed-rate portion of your loan -- but that doesn’t always happen.
Plus, even if the market index rate decreases, you’re not going to get your mortgage for free. In addition to having caps that dictate how much and how fast your mortgage can increase, most hybrid ARMs also have a low-interest rate limit, called a floor. For example, if the floor for your hybrid ARM is 2.5%, that’s the lowest rate you’ll be able to pay, even if interest rates were to go down to zero.