HYBRID ADJUSTABLE-RATE MORTGAGES (ARMS)

Blending the characteristics of an adjustable-rate mortgage (ARM) with fixed-rate mortgage creates a hybrid adjustable-rate mortgage, also known as hybrid ARM or a “fixed-period ARM”. 

The initial period with a fixed interest rate will be followed by an adjustable-rate period in this type of mortgage. When the fixed interest rate expiration date has passed, an adjustment is made based on an index and a margin addition. Reset date is referred to as the date at which the change from the fixed rate to an adjustable one has occurred in the mortgage loan. 

There are a few configurations of a hybrid ARM. The most common one is the 5/1, which consists of a fixed five years initial term followed by a term with adjustable rates resetting every 12 months. Other than the 5/1 configuration, there are also 3/1, 7/1, and 10/1 ARMs as well, with a fixed rate three, seven, or ten years respectively, after which adjustments are made annually. Other ARM structures, such as the 5/5 and 5/6 ARMs, both feature a five-year fixed-rate term followed by an adjustable term every five years or six months, respectively. Less commonly used ARMs, such as 2/28 and 3/27, have a fixed interest period for the first two and three years, followed by an adjustable-rate period of 28 and 27 years, respectively. 

When choosing a hybrid ARM, the borrower needs to be aware of the time frame of the mortgage and expiration date of the fixed-rate term as well as consider the risks involving the reset date. The reset could substantially increase the payments if a significant change occurred in the interest rates. Luckily, the amount by which the interest rate can adjust is limited by the interest rate cap. If you are confused by all the choices, you can pick up the phone and call experts from Champions Mortgage, we will happily explain all the confusing details to you, and assist you in picking the perfect ARM configuration.