I’ll be the first to admit the real estate and mortgage industries have their very own special word salad. Various terms and words can have different meanings based upon context and the mortgage industry is no different. Enter the term ‘hybrid.’ Yes, it’s alive and well in the industry but for some it can be confusing as it relates to getting a home loan.

I’ll be the first to admit the real estate and mortgage industries have their very own special word salad. Various terms and words can have different meanings based upon context and the mortgage industry is no different. Enter the term ‘hybrid.’ Yes, it’s alive and well in the industry but for some it can be confusing as it relates to getting a home loan.

What’s a hybrid? A hybrid is a combination of one or more characteristics combined into one new entity. Automobiles have hybrids. So does food and agriculture. Pretty much any industry can boast some form of a hybrid. In the mortgage industry, hybrids also abound.

We’ve said before here in this very column that home loan terms fall into two distinct categories: fixed and adjustable. A loan is either fixed, where the interest rate never changes throughout the life of the loan. An adjustable loan is one where the monthly payment can adjust based upon previously established terms. An adjustable rate mortgage, or ARM, doesn’t change ‘willy nilly.’

There are some rules an ARM must follow. Specifically, paying attention to the basic index in which the ARM is tied.
Then there’s the margin.  The margin dictates how much the new rate can become adjustment time. And finally there are rate caps which limit how much the rate can change when it’s due for an adjustment. But we didn’t mention hybrids, did we? So if hybrids are a ‘thing’ where do they fall in the mortgage biz?

A hybrid at its very base is indeed an ARM. So why the hybrid tag? Hybrids used to be a very attractive option when rates were at relative highs. A hybrid starts out at a slightly lower rate compared to similar ARMs.

It’s called a hybrid because there is an initial period where the loan is fixed for a predetermined period. A 5/1 hybrid means the rate is fixed initially for five years and the one indicates when the adjustment can take place after the initial five year period. In this example, the rate may change, after five years, once per year. Most such loans also employ caps when limiting how much the rate can change after the five year period at each adjustment.

So why do some choose a hybrid? The initial rate will be lower compared to current market fixed rates. Further, many may know they’re likely to move before the five year term is up. Personally, I prefer the stability of a fixed. But hybrids can work well in specific, niche circumstances.

Position Realty
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