Is a Hybrid ARM Right for You?
A hybrid ARM mortgage is a home loan that allows you to secure a low interest rate for a fixed period of time, usually five, seven or ten years. After this fixed period, interest rates may adjust periodically, generally resulting in higher payments. Adjustments are based on the term; a 5/1 hybrid option ARM is fixed for five years and adjusts annually thereafter.
Hybrid ARM Loan Benefits
One of the biggest advantages of a hybrid ARM mortgage is the low rate during the initial fixed period. These interest rates are often substantially lower than a 15- or 30-year fixed rate mortgage, translating to affordable payments and better cash flow. If you invest wisely and plan to change homes, you could ensure your family's financial future.
Hybrid ARM Mortgage Risks
Although a hybrid ARM mortgage can initially save you money, this type of loan has its risks. If you remain in your home after the rate adjusts, payments will increase, causing your cash flow to decrease. If your payments increase dramatically and you can't pay, you may face foreclosure. In fact, the resetting of adjustable-rate mortgages was a major cause of the mortgage crisis in 2008.
Many people chose a hybrid ARM mortgage and thought they'd be able to sell or refinance when the rate adjusted. Unfortunately, decreasing real estate values foiled this plan, and many homeowners ended up owing more than their homes were worth. Without the cash necessary to pay the difference between what they owed and their homes' values, many of these homeowners were unable to sell or refinance.
Who Should Choose a Hybrid ARM Loan?
A hybrid option ARM is best for those who plan to put down a substantial down payment, ensuring sufficient home equity. This may also be a good option for those who can afford the payments, even if they increase. Before deciding on a hybrid ARM loan, find out exactly how often the loan will reset and how high it can go. This will allow you to budget for larger payments when the time comes.
How Much Can a Hybrid Option ARM Save You?
You may be wondering how much you could save with a hybrid option ARM. Let's say you have a $300,000 loan at a fixed rate of 5.8 percent, with monthly payments of roughly $1760. If you refinance with a five-year hybrid ARM loan at an initial fixed rate of 5.05 percent, your monthly payments will be about $140 less. When the five-year fixed period ends, you’ll have saved over $8,400!
At this point, however, you'd need to take action to avoid complications from the rate adjustment. Although it may take several months of payments at the new rate to cancel out your savings from the initial period, future hikes could jeopardize your family's finances.
Choosing a Hybrid Option ARM
If you're planning to stay put indefinitely and you prefer stable, fixed payments, a hybrid ARM mortgage isn't the best choice. If you anticipate a change in employment that requires you to move or a new home purchase within a few years, you may benefit more from a hybrid ARM loan.
To determine if a hybrid ARM loan is right for you, run the numbers and weigh the pros and cons of each before making a decision. Try the mortgage calculators and expert tools at HomeLoanCenter.com.
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