Hybrid ARM
Candlefocus EditorThe initial rate on a hybrid ARM is typically lower than comparable fixed-rate mortgages, and that's why many homeowners are tempted to opt for a hybrid ARM mortgage. After the initial period of the mortgage, the interest rate adjusts annually (with the 5/1 hybrid ARM). So the initial rate enjoys the benefit of a lower introductory rate and after the fixed rate period expires the interest rate will then adjust with the market.
Aside from the initial lower rate, hybrid ARMs offer another attractive element because the interest rate and monthly payments can decrease if the market interest rate declines during the adjustable period. With a fixed-rate mortgage, the monthly payment stays the same after the fixed period expires.
Borrowers should keep in mind that although rates can decrease, they can also increase over the life of the loan if the market rate increases. That’s why it’s important to understand various aspects of a hybrid ARM, such as the index or benchmark used to determine the changes in interest rate, and the associated margins to calculate the annual percentage rate (APR).
The risk associated with hybrid ARMs makes this type of loan generally not suitable for many first-time home buyers since payments can drastically increase over the life of the loan. That's why its important to understand the vested interest of the lender with regard to the loan rate when you shop for a loan. Keeping up with trends in the market and understanding your own goals is essential when deciding whether or not a hybrid ARM is a good choice for you.
Overall, hybrid ARM mortgages can offer homeowners lower initial mortgage payments and the potential for decreased payments if market interest rates decrease. But because these loans can become variable and reset annually, the risk involved with a hybrid ARM makes them generally not suitable for many first-time homebuyers. That is why it is important for homeowners to understand the details of the loan, such as the index and margins used for annual adjustments, before deciding to opt for a hybrid ARM.