keysIt’s no secret that the current housing bust has caused record low mortgage rates. So many homebuyers are wondering what the best loan option is for buying new real estate. There are a large variety of mortgage loan options to choose from, from fixed rates to interest only, from adjustable rate mortgages to bridge loans. Very few, however, have heard of a hybrid loan. No, we’re not talking about the car! A hybrid or “two step” loan is a combination between a fixed rate and adjustable rate mortgage (ARM). This popular loan type allows homeowners to obtain an even lower interest rate than most other loan options. Here’s how it works, how it could benefit you, and what to watch for!

Hybrid mechanics: Hybrid loans start with extremely low fixed mortgage rates which allows homeowners the option to gain minimum interest on their monthly payments for an estimated five to seven years. The loan then changes to an adjustable rate mortgage after this set time and rates change into the current market interest rates. The overall term of the loan is usually about thirty years, and there are multiple initial fixed rate periods to choose.  The rate periods vary from 2, 3, 5, 7 and 10 year blocks.

Don’t forget your cap: Some people are leery of hybrid loans due to the adjustable rate portion of the mortgage. They don’t want to be knocked for a loop by such a dramatic interest rate increase. This transition can be softened by opting for a loan with an interest cap. The lifetime cap and the adjustment-cap are the two to choose from, and the lower, the better!

Do your homework: Homeowners who don’t plan to occupy their property long, or plan to refinance before the ARM period of their loan takes affect should be forewarned. If you’re not aware of your refinance or opt-out options before you sign, you may end up stuck in an mortgage interest increase you weren’t prepared for. Homeowners should also be aware of loan advertisements promising a hybrid loan as a “fixed” rate loan. Always ask how long the rate is fixed for.


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This is filed under Home Loans/ Mortgages.

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