As a homeowner mortgage loan products can get confusing. There are multiple options to choose from including a 30 year fixed rate mortgage, 15 year fixed, adjustable rate mortgage (ARM), and even a hybrid ARM. The type of home loan you select should be based on what will help you to accomplish your financial goals. Your mortgage is more than a way to purchase a home. It is a financial tool to help you plan for your current and future financial needs. Hybrid ARM’s were developed because sometimes those financial needs change.
The Hybrid Arm Explained
The Hybrid ARM is not fixed or variable only; it is a combination home loan. The initial term is fixed then becomes variable after a set period of time. The most common ARM terms have fixed interest rates for the first three, five, or seven years. The loan payment is calculated using a 30 year amortization but the interest rate is lower than what the going thirty year fixed loan rate would be. That is how borrowers save money. You are in essence paying a lower interest rate now and subject to the market interest rate later.
Advertisement
For example, if you owe $200,000 on your home loan and had a 30 year fixed mortgage with an interest rate of 4.3% your monthly principal and interest payment would be $989. If instead, you had a five year ARM at 3.37% your payment would be $883. In essence, your family would save over $100 a month, every month for those five years.
The Benefit of a Hybrid Loan
The flexibility of the loan can help your family to decrease expenses now, in order to help you achieve life goals. This is ideal for someone that has a spouse going back to school, is paying for the last remaining years of private education, has temporary daycare expense, or is confident in a future promotion and raise. If you need to save money now but will have more cash in the future, an ARM loan makes sense.
The risk that you face with a Hybrid ARM is that when the fixed rate period expires the market conditions could be unfavorable. If interest rates have risen significantly you could be stuck with a mortgage payment that you cannot afford. This is why many people elected to move from an ARM to a fixed rate home loan. The opposite can also be true. If the market adjusts and interest rates drop, you could end up paying less money when your rate expires. When your home loan is tied to the market, it’s a gamble either way. You could win, or you could lose. If the unknown frightens you, stick with a fixed rate mortgage. If you believe that the current financial benefit outweighs the risk, look into an ARM loan.
Speak with your mortgage lender to discuss your financial goals, current needs, and home loan. They can show you what the payment difference will be with a variety of mortgage programs and help you to select the one that helps you to achieve your family’s goals. Call your mortgage banker today to get started.
