What are Hybrid Loans?

A hybrid loan starts off as a fixed rate loan, typically below the current standard mortgage intere rate, which makes this kind of loan appealing to potential home buyers. After about five to seven years, depending on the lender and the terms of the loan, the hybrid loan then converts to an adjustable rate loan.

• The fixed interest rate is much lower than the traditional rate, allowing buyers to save money on their payments, prehaps applying more to principle than they'd be able to with a conventional mortgage.
• The fixed rate lasts for several years, which is enough time for people to either refinance the remaining loan balance or sell the home.
  
• The interest rate may be capped to prevent a large jump in rate when the rate moves to adjustable.

• The interest rate can climb tremendously and vary from month to month, making it very hard to budget the mortgage payment.
  
• Not being able to budget the mortgage payment may cause some borrowers to falter with the payments, which may lead to foreclosure on the home if not properly managed right away.

For those who are trying to decide whether or not to get a hybrid loan, consider the following:

• How long will the rate be fixed? If the rate will be fixed for five years, this is enough time to use this home as a stepping stone to another. If it's fixed for longer than that, there is even more time to build equity in the home before the payments go up.
  
• Will you save money compared to the traditional mortgage rate? Is the money saved from the current interest rate versus the traditional mortgage loan interest rate going to be applied to the principle balance of the loan? This will greatly impact the amount of time you have to pay on the loan, saving you time and money in the long run. For example, if with a traditional mortgage your payment would have been $1000/month, and with this hybrid loan, it's only $700/month for seven years, paying the extra $300/month for 84 months of 360 will do justice to the loan balance, making it easier to afford the adjustable rate in the later term.
  
• Will you get an interest capped loan? If the interest rate is capped, it prevents the adjustable rate term from getting out of control and allows borrowers to budget for a maximum mortgage payment.
  
• How long before the home will be sold? If the buyer's don't plan on selling the home for many years, this may or may not be the best option for them. Usually this works best for people who are going to sell or refinance before the fixed interest term is up, therefore allowing them to save money over the traditional mortgage interest rate. Those who stay in the home for 10 years or more benefit most from the interest rate capped loan that will prevent the rate from jumping too high.