By, Gaurav Bhola, MSM
A hybrid mortgage loan has combined features of fixed rate mortgage and adjustable rate mortgages. A hybrid loan is also known as a fixed-period ARM. A hybrid loan initially begins with a fixed period of a fixed interest rate (typically 3, 5, 7 or 10 years). The hybrid mortgage then converts to an adjustable-rate mortgage. It is a wonderful combination of the best features of a fixed rate and adjustable rate mortgage. This combination gives you an initial interest rate during the fixed period of the loan that is lower than a traditional fixed rate mortgage.
Generally, a shorter fixed period for the hybrid loan means a lower initial fixed interest rate. Most homebuyers prefer the 10-year fixed hybrid home loan even though savings might be larger in the short-run with an initial 3-year or 5-year fixed rate term.
Many studies have shown that most people refinance or sell their houses within 5 to 7 years. Therefore, it makes sense for many homebuyers to opt for a 10-year fixed after which they can refinance or sell their homes thus, never experiencing adjustable rate mortgage payments.
It is of critical importance that you become aware that many hybrid loans contain prepayment penalties. In many cases the prepayment penalty is applicable for the first three years of the loan. Hence, if you sold your home within the three years of your loan origination you would be liable for paying the prepayment penalty. It would be feasible to seek alternative mortgage loan options if you are considering selling your home in three years.
There are several varieties of hybrid mortgage loans:
- Fixed Period ARMs
- Two-Step Mortgage
- Convertible ARMs
- Graduated Payment Mortgages (GPMs)
So before you decide that a hybrid mortgage loan would make sense for you, take time to find out about any fees, potential penalties, and terms of the loan. Make sure you get a free mortgage rate quote from an expert Mortgage Consultant in your area and arrange for a complementary consultation to see if a hybrid loan is best suited for your needs.
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