What is a Hybrid Adjustable Rate Mortgage?

If you take an adjustable rate mortgage, add some fixed rate flavoring, and stir, you get a hybrid adjustable rate mortgage (ARM).  A hybrid ARM acts like a fixed rate mortgage (FRM) for the first few years and then turns into an adjustable rate mortgage. Typical fixed rate periods are 3, 5, 7, and 10 years, after which you’ll have an adjustable rate mortgage on your hands.

Longer periods of fixed interest, command higher interest rates.  (You have to pay for predictability!)  But the appeal of hybrid adjustable rate mortgages is that their initial fixed rate is nearly always lower than the interest rate of fixed rate mortgages.  However, it is higher than the initial rate of regular adjustable rate mortgage loans. 

Because of these qualities, hybrid ARMs are ideal if you’re fairly certain you are going to sell your property within the loan’s initial fixed interest rate period and want the security of a fixed rate within that time.  In this case, you’ll save money by not going with a fixed rate mortgage, whose rate will be higher than the hybrid loan’s initial rate. 

Note that sometimes you’ll find long-term and short-term interest rates are such that there is little or no difference between initial hybrid ARM rates and long term fixed rate mortgage rates.  When this happens fixed rate mortgages are probably the better choice.

A loan type similar to the hybrid ARM is the 7/23.  Like the hybrid loan, the 7/23 switches gears after the first few years, 7 in this case, but not into an ARM.  It adjusts into a different fixed rate for the remainder of the loan.