Hybrid loans are mortgages that are played out in two acts.
Like a play with a very short interval.
It’s easiest to just describe a few of them, look at what makes them good, and point out the not-so-good things to be aware of.
Because new hybrid loans are constantly being created, you are likely to find they are called different names. But don’t worry - they all tend to be variations on the basic themes we are looking at here. So this will give you ideas of what to look for and what you’d want to double check.
Fixed-period ARM
Here, the first act is a fixed interest mortgage. It can last three to ten years.
In the second act, the mortgage becomes a variable mortgage for the rest of it’s life.
So you’ll see hybrid loans described as 3/27 Hybrids or 5/1 ARMs, for example. The 3/27 Hybrid starts off as a 3 year fixed interest mortgage. It then becomes a variable mortgage for the next 27 years. The first act of the 5/1 ARM is a 5 year fixed interest mortgage. Act two is a variable mortgage that adjusts once a year until the loan is paid off.
Some thoughts on why you may wish to consider fixed-period ARMs for your first time home mortgage:
- You get one stable, fixed interest rate for a while. So you know exactly where you are, every month.
- The interest rate is usually lower than that of a 30 year fixed interest mortgage.
- If interest rates are quite low at the time you first sign up for this mortgage, you’ll continue to benefit with low mortgage payments, even after rates have gone up. During the first act.
Why you may think fixed-period ARMs are a bad idea for your first time home mortgage:
- If rates drop after you start the mortgage, you’re stuck with the high rate you have, and high payments. For as long as act one lasts.
- The interest rate you get in act two will be based on the current rates at the time. What if they are sky-high?
- After the stability of the first act, you now have to deal with instability in the second. Changing mortgage payments. Anticipating changes. Making sure you have enough to cover payments.
Could you use a little help?
Here’s a really simple tool that points out important questions to ask about Fixed-period ARMs. Should you choose to have a Fixed-period ARM, this will also give you invaluable help in adjusting (please excuse the pun), to the potentially troublesome act two.
You can get it here -> First Time Home Mortgage Checklist For Adjustable Rate Mortgages
Two Step Mortgage ( Two Step Loan)
With a two step mortgage, act one is a fixed interest mortgage which can last up to seven years.
In act two, the interest rate is calculated, based on the rates at the time, and then a second fixed interest mortgage is rolled out.
Here’s a checklist of 10 items to make special note of, with a two step mortgage -> Two Step Mortgage Checklist
Convertible Adjustable Rate Mortgages
In Act 1 you get a variable mortgage.
In Act 2, if you want, you can convert the variable mortgage into a fixed interest mortgage, based on what the rates are at the time you convert.
So, if interest rates start going up, you can freeze your mortgage rate and stop any further increases.
Be aware:
Carefully compare the rates with standard adjustable and fixed rate mortgages. You might find that these convertible ones come with higher interest rates
You’ll probably have to pay a conversion fee.
There may be restrictions on when you make the conversion.
Action plan
When reviewing convertible adjustable rate mortgages, look out for the above three points and use this -> Variable Mortgage Checklist
Convertible Fixed Interest Mortgage.
Act 1 is a fixed interest mortgage.
Act 2 is still the fixed interest mortgage. But the interest rate has been adjusted, based on market rates at the time when you convert.
So, if interest rates drop after you get the mortgage, you can take advantage of them by changing your mortgage rate. And you keep all the advantages of a fixed interest mortgage – stability, etc.
It’s a bit like a two step mortgage.
Be aware:
You may have to pay a conversion fee.
There will be conditions
Action plan
When reviewing any convertible fixed interest mortgage, ask about the two points above and use this -> The Two Step Mortgage Checklist
Tags: convertible mortgage, Fixed-period ARM, Hybrid Loans, two step mortgage
