A conceptual look at mortgage rates.First came hybrid plants, then hybrid cars, and now we have hybrid adjustable-rate mortgages. Those looking for mortgage financing options other than the “traditional” 30-year fixed rate mortgage, 15-year fixed rate mortgage, and the regular adjustable rate mortgage (ARM) now have hybrid ARMs to consider.

What is a hybrid ARM?

A hybrid ARM has characteristics of a fixed rate mortgage and an adjustable-rate mortgage. Also known as a fixed period ARM, a mortgage company in Phoenix may offer it along with traditional mortgage financing options.

A hybrid ARM has a fixed interest rate period (three, five, seven, or ten years) and an adjustable rate period. Once the fixed rate period expires, the interest rate begins to change or adjust. The adjustment will be based on an index and a margin. This is why you would see hybrid ARMs being offered in 3/1, 5/1, 7/1, and 10/1 variations.

How much will the interest rate change?

As mentioned, the interest rate changes at the end of the fixed rate period in a hybrid ARM. There are caps on these adjustments, so those choosing this options won’t have to worry about paying an inflated amount of interest. The initial adjustment cap is usually 2 percent above the mortgage’s start rate, but if the initial term is five years or more, then the caps can climb up to 5 percent.

The annual or periodic caps are usually 2 percent above or below the current rate, while the lifetime cap is set at 5 percent or 6 percent above the start rate. This, of course, depends on the term.

To illustrate, let’s say you choose to go with a 5/1 ARM. This option may have a 3 percent fixed interest rate for the first five years. This can be compared to a 30-year fixed rate mortgage, which has a 4.5 percent interest rate. If the mortgage price is $200,000, this means you would be able to save $170 a month.

At the end of the fixed rate period of five years, the interest rate on your 5/1 ARM will adjust every year, plus a 2.25 percent to 2.75 margin. In total, you would be able to save $10,200, thanks to the adjustment caps.

When is a hybrid ARM ideal?

What would make a hybrid ARM a better option than a 30-year fixed rate mortgage is when you are certain you would not be living in or owning the house by the end of the indicated fixed rate period. Although many people choose 30-year mortgages, the fact is very few live in the house or stay in the mortgage for that long – plans can change as there may be a need to move house or sell it.

It’s great to know today’s home buyers are given more options when it comes to mortgage financing. Individual circumstances may differ, after all, so make sure you do your research to find the best mortgage option that best fits your financial situation.

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