Hybrid ARMs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both
fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest
rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the
loan converts to 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.
The beauty of a fixed-period ARM is that the initial interest rate for the
fixed period of the loan is lower than the rate would be on a mortgage that's
fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate
while have some period of stability for your payments. A typical one-year ARM
on the other hand, goes to a new rate every year, starting 12 months after the
loan is taken out. So while the starting rate on ARMs is considerably lower
than on a standard mortgage, they carry the risk of future hikes.
Homeowners can get a hybrid and hope to refinance as the initial term expires.
These types of loans are best for people who do not intend to live long in their
homes. By getting a lower rate and lower monthly payments than with a 30- or
15-year loan, they can break even more quickly on refinancing costs such as
title insurance and the appraisal fee. Since the monthly payment will be lower,
borrowers can make extra payments and pay off the loan early, saving thousands
during the years they have the loan.