A hybrid mortgage loan is both a fixed-rate loan and an adjustable-rate loan. With a hybrid mortgage loan, the interest rate you will be paying during the first five or ten years of your payment term will have a fixed rate. Afterwards, adjustable interest rates will apply with the rest of your payment term period.

Types of Hybrid Loans

The first type of hybrid loan applies a low fixed interest rate during the initial period. Available terms can be 3/1, 5/1, 7/1 and 10/1 periods. For example, with a 3/1 period, you will be paying for a low fixed rate of interest for the first three years. And for the rest of your payment term, adjustable rates will apply. Thus, in a typical 30-year payment term, you will be paying for adjustable rates for the remaining 27 years of your mortgage loan.

Another type of hybrid loan uses a both a low fixed rate and a higher fixed rate for the duration of the payment term. This means, during the first years of your payment term, a low fixed interest rate will apply. However, when you reach the second phase of your payment term, a higher fixed interest rate will be applied to your mortgage payment.

The Loan Cap
For both types of hybrid mortgage loans, a loan cap applies during the second phase of the payment term. A loan cap is the maximum amount that will be added to your payment with each adjustment interval. This will depend on how much the lending company requires. Usually, your loan cap may be an increase of at least two percent each year and six percent for the entire loan period. However, this is not always the case.

Why Choose Hybrid Loans

Hybrid mortgage loans are great for home buyers who do not intend to stay in the house for too long. With a hybrid mortgage loan, they can pay for a low rate of interest within the entire time that they live in the home. When the initial term expires and the adjustable rates apply, that will be the time to give up the home property. If you know that you won’t be living in the same house for 30 years, then perhaps you would like to consider a hybrid mortgage loan.

However, there is also a disadvantage. If you decide to keep the house after all, then you will be paying for high interest rates or adjustable rates that may increase even higher over time. Thus, if you cannot guarantee that you will not be keeping the house for a long time, it may be best to apply for the standard low fixed rate mortgage loan.

If you are decided on applying for a hybrid mortgage loan, make sure that understand all the terms in the agreement. Make sure that you are aware of all the rates that apply to your loan. Don’t forget to inquire about the cap on your loan rates. Also, check if there will be penalties in case you decide to make an advanced payment on your loan before the initial payment period with a low-fixed rate expires.

About Melanie Mathis

Melanie Mathis is a credit analyst and a writer for 8 years. She has been participating in the programs of NHBS, Inc such as their continuous effort in giving out Free Credit Repair and Building Ebook. Connect with Melanie Mathis on Google+

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