7 Year Fixed Rate Hybrid Mortgage - Sometimes referred to as the "7/1", the 7-Year Fixed Rate Loan is a mortgage where the interest rate is fixed for 7 years. After the 7-year fixed period, the interest rate adjusts, usually once a year, for the rest of the loan term. Most 7 Years Fixed Hybrids are amortized for 30 years. That is, payments are calculated so the home loan is paid off in 30 years.Under normal interest rate climate, the interest rate of a 7-year fixed rate hybrid is usually lower than that of a 30-year fixed rate mortgage. The "7/1 ARM" is designed for homeowners who do not intend to keep their mortgages for more than seven years to take advantage of the lower interest rates during the initial seven years.
In additon to 7/1 ARMS, there are also hybrid ARMS with different fixed terms, including 3/1 and 5/1.
The interest rate offered for this type of ARM is usually lower with a shorter fixed term. So a 7/1 ARM will have a higher interest rate than a 3/1 ARM.
Statistics have shown that Americans keep their home loans on average for less than 7 years. For younger homeowners who plan to "trade up" their homes. A Hybrid mortgage with a 7-year Fixed Rate period, which usually have a lower initial interest rate than the 15-year Fixed and the 30-year Fixed, may be a better loan option.
Sometimes the rate differences between these hybrid type mortgages and fixed rate mortgage are so minimal that it may make more sense to obtain a fixed rate mortgage. So make sure that you ask about what all of your rate and program options are up front.
5 Year Fixed Rate Hybrid Mortgage - A mortgage program in which the interest rate remains the same for the initial 5 years. At the end of the fifth year, the mortgage turns into an Adjustable Rate Mortgage for the remainder of the loan term. Payments of most 5-Year Fixed Rate Hybrids are amortized for 30 years.
This loan program is named "5/1 Hybrid" because it starts out as a Fixed Rate Mortgage (FRM), then changes to an Adjustable Rate Mortgage (ARM). For this reason, it is also commonly refered to as the "5/1 ARM".
This is also called a 5/1 ARM meaning that the rat is fixed for the first 5 years and adjusts 1 a year every year after that.
When the adjustment period begins there is a cap for how much the rate can adjust in the first year, and each year after that. These loans also have a cap for the life of the loan as well as a floor rate, which is the lowest rate the loan could ever have.
The hybrid or ARM loans are a great option to save money on your monthly payment especially when used in the right situations. If you plan on moving within the next 5 years, there is no reason to obtain a higher rate mortgage that is fixed for the life of the loan instead of a 5 year fixed rate loan.
In most cases, mortgage rates are higher when the "fixed" period is longer. In other words, a 30-Year Fixed Rate mortgage usually carries an interest rate higher than a 5-Year Fixed Hybrid (5/1 ARM). For home buyers who do not intend to keep their mortgages for more than 5 years, a 5/1 ARM is usually a smarter choice because of its lower initial interest rate.
If you think you may need a ARM with a longer fixed term ask your mortgage broker about a 7 or 10 year ARM. The rates may not be as good as a 5 year ARM but they are still lower then a fixed rate loan.
For the past ten to fifteen years, this has been one of the most popular loan programs on the market. The reason for this is simple. The average mortgage loan in the United States is kept less than five years. In these days of frequent refinancing and frequent moving from one home to another this loan will make much more sense than a long term fixed program such as a thirty year fixed. With this program borrowers can save thousands of dollars in interest over the five year period when compared to the traditional thirty year fixed.
3 Year Fixed Rate Hybrid Mortgage - A type of home loan where the interest rate stays the same for the first 3 years of the loan term, thereafter the interest rate is adjusted periodically. Depending on the indices used, after the initial fixed rate period, the interest rates of most 3-Year Fixed Rate Hybrids adjust annually. The 3 Years Hybrid is sometimes referred to as the "3/1".
With this type of loan there are caps for adjustments each year and for the life of the loan. When the adjustment period begins the rate could adjust up or down depending on the market conditions and the index the rate is based on.
This loan is also known as a 3/1 ARM Loan
On a 3 year arm your first adjustment will happen after you make your 35th payment. Usually the caps are set at 2/2/6, which limit the increases and decreases in your rate.
Under normal economic climate in the interest market, the longer the fixed period is, the higher the interest rate. In other words, a Hybrid with a 5-year fixed rate period has a higher interest rate than a Hybrid with only a 3-year fixed period. This rule also holds true with almost all interest bearing financial products, such as Certificates of Deposits. For instance, a 12-month CD almost always offers a higher Annual Percentage Yield (APY) than a 6-month CD.
A 3 year ARM may be a good solution if you only plan to live in your house for a few years. The lower rate offered by a 3/1 Adjustable Rate Mortgage also makes this loan popular for first time home buyers because it can be used to build higher credit scores during the initial fixed interest period.
