A hybrid adjustable mortgage, or hybrid ARM, is a mortgage loan with an interest rate that is fixed, which means the loan amount stays consistent, after an initial period and then acts adjusts annually after the initial fixed period, like an adjustable rate mortgage, or an ARM. An adjustable rate mortgage is a loan where the interest rate adjusts based on indexes or prime rates. Lender often set a cap for how high the interest rate can reach annually.
Hybrid ARM loans hybrids together both a fixed rate and an adjustable rate mortgage. Also unlike an ARM, VA Hybrid ARM adjust only once a year and are tied to a financial index that averages rate changes over a twelve month period so as not to subject the borrower to wild payment swings, except for the first adjustment which may occur no sooner than 36 months from the date of the borrower’s first mortgage payment on 3/1 ARM or 60 months from the date of the borrower’s first payment on the 5/1 ARM. The cap on the interest rate is 5% for VA hybrid ARM.
There are several different terms for a hybrid ARM. Hybrid ARM term is referred to first by the fixed amount rate and then the adjustable amount rate periods. For example, hybrid ARM 3/1 is a fixed mortgage rate for 3 years and an adjustable rate for 1 year. The date the fixed rate switched to the adjustable rate is known as a reset date. A Hybrid ARM transfers some interest rate risk from the lender to the borrower allowing for lower interest rates. The usual Hybrid ARM rates are 3/1, three years fixed rate and 5/1, with a five-year fixed rate. These rates are usually 30-year programs.
There are many advantages to a VA hybrid loans. Here are the top three reasons:
Hybrids are the best of both worlds, getting a fixed rate at first but then later having more flexibility with the adjustable rate. If you cannot decided between which kind of loan to get, get both! Hybrids are great if you feel that rates will be lower in next couple of years, since you have a fixed rate at first when rates that is usually 1-2% lower than a fixed rate and then the loan amount will adjust to a possible lower rate. Since there is a cap in place from the lender, the rates during the adjustable period cannot be higher than 1%. Also, if you know that you will be making more money in the next couple of years, like if a borrower is in school, a hybrid in another great option.
Hybrids are particularly great if a borrower will not be staying in their home long. Since you can get the lower interest rate for hybrids, a borrower can buy a home at a lower interest rate with a hybrid and then sell it before the rate becomes adjustable. The VA hybrid loan typically an initial start rate of 1-% lower than the going 30 years fixed rate. This can amount to an extra $100 to $200 a month in savings and if you will not be in your home long, you will never have to worry about rates fluctuating.
Interest rates are also lower for an ARM, so it is easier to borrower more. This can help first-time homebuyers afford a larger home.
There are many great benefits that come from having a hybrid VA loan and this option should be looked at by anyone wanting to purchase or refinance their home.
But is the 3 and 5-year Hybrids the only option? NO.
Let me introduce the 7 years VA Hybrid Loan.
When shopping for a mortgage, it’s very important to pick a suitable loan product for your unique situation. Whether that is the 3, 5 or 7 Year Hybrids or the 30 years fixed.
Let’s compare two popular loan programs, the “30-year fixed mortgage vs. the 7-year ARM.”
We all know about the traditional 30-year fixed – it’s a 30-year loan that never adjusts. Pretty simple, right?
But what about the 7-year ARM? During the first seven years, the mortgage rate is fixed, and for the remaining 23 years the rate is adjustable.
This makes the 7-year ARM a so-called “hybrid” adjustable-rate mortgage, which is actually good news.
You probably don’t want your mortgage rate (and mortgage payment) to change all the time, especially if it’s only going to move higher.
With the 7-year ARM, you get mortgage rate stability for seven years before even having to worry about the first adjustment (much longer than the other hybrids). And because most homeowners either sell or refinance before that time, it could prove to be a good choice for those looking for a discount.
That’s right, the 7-year ARM is cheaper than the 30-year fixed, or at least it should be. By cheaper, I mean it comes with a lower interest rate than the 30-year fixed which equates to a lower monthly mortgage payment.
Let’s just assume that mortgage rates on the 7-year ARM average 2.75 percent. Meanwhile, the average rate on a 30-year fixed was 4 percent.
That’s a difference in rate of a percentage point, and a difference in payment of $136.21 a month, $1634 a year, and over $11,000 over the first seven years on a $200,000 loan amount. A much greater savings compared to either the 3 or 5-year hybrid options.
Loan amount: $200,000
30-year fixed monthly payment: $951.04
7-year ARM monthly payment: $814.83
So not only do you save long-term, but you also save monthly, meaning you can put that extra money to good use somewhere else, such as in a more liquid investment, or simply to pay other bills.
But is it worth it?
If you actually plan on staying in your home and paying off your mortgage, you face the possibility of an interest rate reset (higher, or lower).
And you don’t want to get caught out if rates surge over the next seven years, especially if you can’t sell or don’t want to.
However, if you’re like many Americans, who sells or refinances within seven years, the program could make a lot of sense.
Just be sure to do the math on both scenarios before committing to either of these loan programs.
As always, you should be able to afford the fully-indexed rate on the ARM, should it adjust higher. So if a rate adjustment isn’t within your budget, or won’t be in the future when it adjusts, you may want to pay it safe with a fixed-rate mortgage.
Put simply, the 7-year ARM offers the greatest amount of savings over 7 years, whereas a 30-year fixed is pretty straightforward and stress-free. And that’s why you pay more for it.