Is a Hybrid Loan Right for You?
April 20, 2023
There are many forms of hybrid loans that can help home buyers. Hybrid, or mixed rate loans, feature both fixed-rate loans and adjustable-rate mortgages, or ARMs, so you can take advantage of having both during the loan payment period. Both types of loans have benefits and drawbacks.
Fixed-rate loans are predictable. Your interest rate will not change so you will always know how much you need to pay every month. Adjustments to your rate do not typically begin until the loan has been in force for a minimum of ten years.
Adjustable-rate loans generally start at a much lower interest rate which is helpful for many home buyers. But if interest rates rise, so does your payment. Lower interest rates are also helpful for borrowers with less than good credit scores who may then have time to build a better credit history and a higher credit score.
Hybrid loans are helpful if you plan to move or refinance your property within a short time. You may be able to get out of the loan before any rate adjustments occur if you make additional payments, or prepayments, to pay off your loan balance before any rate adjustments begin.
Usually, interest rates on a hybrid loan are significantly lower than rates in a standard 30-year mortgage and do not change until several years later. It is important to speak with your lender about a cap on how much the interest rate can change in a given year.
A hybrid ARM uses a fixed rate for three years, five years, seven years, or ten years. During that period, the rate stays the same. For example, a 7/1 hybrid mortgage ensures that the rate will remain the same for seven years. After the time expires, the interest rate changes. In a 7/1 hybrid mortgage, the rate is locked for years but will fluctuate every year after the seven year period.
Determining the Interest Rate
Two factors impact your interest rate. Your lender starts with an index rate and then adds a spread. If your loan uses the London Interbank Offered Rate (LIBOR) as an index to determine your interest rate, your rate will move when the index moves. However, your lender may limit or cap how much your interest rate can change. Initial caps limit how much your interest rate will change when your fixed rate period is over. Periodic caps limit interest rate changes every time an adjustment occurs. Lifetime caps limit how many adjustments can happen over the life of the loan.
It is vital to work with a mortgage company that can offer you the widest range of products and services when looking for the right mortgage loan. Superior Mortgage Co., Inc., is a specialist in residential and commercial loans and has access to all the loan options available to borrowers. If you want to purchase your first home, a second home, or simply make improvements on an existing property, we can help. We have the skills, experience, and the best products available to help you make the right decision. Call Superior Mortgage Co., Inc. at 845-883-8200 or email [email protected] for additional information. We look forward to hearing from you