Many potential homebuyers are now seeing the advantage of an adjustable-rate mortgage (ARM) because of its low-interest rate. If you are thinking of choosing this loan over a fixed-rate, know that there are introductory or initial rates to ARMs. After this period expires, the interest rates will reset (increase or increase) depending on the market conditions.
ARMs are risky to some buyers, so many prefer the stability and predictability of a fixed-rate mortgage. If you are torn between these two options, it is a good idea to look into an ARM hybrid mortgage product. One common type of this is 5/1 ARM, which has a locked interest rate for five years and then changes every year.
Types of Hybrid Loans
In a 5/1 loan, the 5 refers to the number of years with locked rate and the 1 refers to the number of years the rate will change. While 5/1 is the most popular option, there are other hybrid ARMs to choose from. Home loan providers from Primarynw.com note that there are also 3/1, 7/1, and 10/1. In some rare cases, there also that offer 5/5 ARMs, which has a five-year initial period and rate adjustment every 5 years.
Low Payments Initially
ARMs have lower rates than fixed-rate mortgages because of the risk of higher rate in the next months. The rates on hybrid mortgages fall between the interest rate of fixed-rate and typical ARMs. This results in lower monthly payment on the initial period of the loan. Some also consider the interest-only hybrid ARM, where they need to pay the monthly interest expense on the loan value in the early years of the loan.
Hybrid loans are ideal if you plan to keep the home for a short amount of time and sell it before the end of the initial period. This can also work if you intend to refinance before the initial period ends. It is also good to know that when the rates adjust, there is a possibility that it will decrease, resulting in lower monthly payments.