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Hybrid ARM

By: Groshan Fabiola

Some people are looking to buy new homes when the time is right. If you are in the market for a new mortgage and not planning to reside in your home indefinitely, now is a great time to consider the hybrid ARM option. This allows you to secure a low interest rate for a fixed period. After the fixed period, your interest rate is subject to periodic adjustments and your mortgage payments generally increase. Adjustments are based on the term, so a 5/1 ARM is fixed for five years and adjusts annually after that.

One of the biggest advantages of a hybrid ARM is the rate you enjoy during the initial fixed period. Often, your interest rate is substantially lower than that of a 15 or 30-year fixed rate mortgage, which translates to affordable payments and better monthly cash flow. If you invest those savings wisely and plan to change homes in the future, you could secure a solid financial future for your family. Keep in mind, however, that if you remain in your home after the rate adjusts, your monthly payments will likely increase and your cash flow will decrease. A hybrid ARM is ideal for individuals who plan to sell their homes within seven to ten years, because they can benefit from the low initial payments and dump the loan before its higher period begins.

If your current mortgage is fixed at 5.8%, which means your monthly payments are about $1760. If you refinanced into a 5-year hybrid ARM with an initial fixed rate of 5.05%, your mortgage payments would be reduced by about $140 per month. When the fixed period of your ARM concludes at the end of 5 years, you would have saved over $8,400. At this point, however, you would need to take action, in order to avoid complications from the rate adjustment. Current interest rates are steady but future hikes could be detrimental to your family’s finances, although it would take several months of payments at the new rate to cancel out the benefits of what you saved during the initial period.

If you are planning to stay put indefinitely and prefer the stability of fixed payments, a hybrid loan is not the right choice. Similarly, borrowers who do not anticipate changing jobs or outgrowing their homes within a few years may benefit more from a conventional fixed rate mortgage. Remember that the best way to determine if a hybrid ARM is right for you would be to run the numbers and calculate your potential savings. While you do not have a crystal ball to predict the future, you can draw certain conclusions about your fiscal plans and determine whether you are comfortable with the trade-off of lower initial rates versus predictable payments. Furthermore, the hybrid ARM comes in a number of different configurations, so be sure to compare the merits of each, before making your decision.

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