Hybrid Mortgages
Recently the United States has seen a housing boom, and people with middle to low incomes have become challenged to come up with the money to match the skyrocketing prices of homes and increased down payments. Plus, as interest rates have begun to increase, getting a mortgage for the everyday worker becomes seemingly impossible. This is why hybrid mortgages were created, to bridge the gap between what the average person is able to afford with the increasing prices of homes.
1. Fixed to ARM
Previously, the way to bridge the gap caused by higher interest rates was to change from a simple fixed rate mortgage to an adjustable rate mortgage. However, concerns were raised by homeowners about the possibility of increased payments throughout the life of their mortgage payment, more so when interest rates spike. That concern prompted the creation of hybrid mortgages.
2. Fixed Period Arm
A hybrid mortgage usually goes by the name fixed-period ARM, and it is a combination of the fixed rate and adjustable rate mortgages. Usually a hybrid mortgage will begin with a fixed interest rate for anywhere from 3 to 10 years. After that period, the loan becomes and adjustable rate mortgage, and then your mortgage payment can be adjusted on a yearly basis. A benefit of hybrid mortgages is that the initial interest rate will usually be much lower than the interest rate on a 30 year fixed mortgage.
3. Time of Loan
When looking at hybrid mortgages as an option for your mortgage, you will want to take into consideration that the shorter the fixed term of your loan, the lower your initial interest rate will be. So if you know your will not be living in your home for more than three to five years, you may want to opt for the shorter fixed term and get the best savings from hybrid mortgages.
4. Watch out...
In some states hybrid ARMs do have prepayment penalties, while in other states prepayment penalties are illegal. Usually there is a prepayment penalty for the first three years of the hybrid mortgage. This means that if you sell your home within the first three years you own it, then you will have to pay a fee to your hybrid mortgage lender. If you live in a state where prepayment penalties are legal, you will want to be sure you are going to stay in your home for at least three years or opt for an ARM.
5. Balloon Fixed
Another type of hybrid mortgage that borrowers consider is the balloon payment fixed mortgage, which usually have short terms of 5, 7, or 10 years. These hybrid loans have lower interest rates than 30 year fixed mortgages or fixed-period ARMs. With a balloon payment fixed mortgage, your entire balance would be due at the end of the term. In some cases, this type of hybrid mortgage would allow you to extend your loan for one year at an ARM rate, which offers borrowers some peace of mind if refinancing at the end of the loan is difficult.
Still, hybrid mortgages make buying a home somewhat easier for middle to low income families in todayÕs booming real estate market. Consider closely if a hybrid mortgage is right for your financial and living situation.
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