Hybrid Mortgage

The term hybrid mortgage can be loosely used to describe any types of mortgage that is not an FRM, ARM, or one that already has a name for itself such as a balloon.

The most common type of hybrid mortgages are those that have an initial period of fixed rates for a number of years, then it converts to an adjustable rate loan.

This is sometimes referred to as a hybrid ARM.

When borrowers take on such loans, the terms often have an adjustment cap when adjustable rates kick in to prevent interest rates from hiking to unaffordable levels.

While it is uncommon to find hybrid loans that start an initial period of adjustable rates and later convert to fixed, there are some lenders who do offer such interest rate structures.

The main reason for it’s unpopularity is that lenders will be taking on a huge risk for long term interest rates when a loan starts off as adjustable rates pegged to an index.

Another popular hybrid home loan is teaser rate loans.

These loans are in effect variable rate loans that start off with very low interest rates usually below the index rate. After which it switches to a typical ARM with fully indexed rates.

Because of how low interest rates can be during the initial years of hybrid loans, they are very suitable for real estate investors who have a short term exit strategy or home buyers who intend to sell the house within the near future.

This would allow them to be only subjected to low interest rates. and then fully repay the loan with the sales proceeds when the house is sold.