The Hybrid Mortgage Loan is usually a combination of two loans: A fixed-rate home loan and an adjustable-rate home loan. Its initial rate may be the first three, five, seven, or ten years of the loan period. After that, the loan becomes an adjustable rate mortgage, with the rate adjusting up or down every six or twelve months.
Hybrid mortgage loans carry less risk than one-year ARMs and the interest rate is generally lower than fixed-rate loans.
Since many homeowners remain in their homes for about seven to10 years, combination loans allow home buyers to take advantage of lower interest rates in the first few years of the mortgage. Hybrids and ARMs are generally assumable, which is a plus when homeowners plan to sell in the near future. Besides, adjustable rate mortgage rates can decrease in declining interest rate markets reducing your loan payment.
Hybrid loans are typically available in 3/1-, 5/1-, 7/1-, or 10/1-year terms. In a 5/1 hybrid loan, for example, the initial five years of payments will be an exceptionally low fixed interest rate, often 1 to 1.5 points less than the current low rate for a 30-year fixed-rate mortgage. Then the balance of the loan, in this case, 25 years, will have an adjustable rate. A second, less-common type of hybrid loan has a low fixed rate for its first few years, which turns to another (usually higher) fixed rate for the remainder of the loan. On both loans, the rate on the second period of the loan has a cap, but not always. The cap is often two percent per year, and six percent for the life of the loan.
This type of home loan is very attractive to the homebuyer who knows they will only live in the home for a few years.
