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hybrid loans are a combination of fixed
rate and ARM loans. These ARMs attach
a delayed adjustment period during which
the initial period is fixed.
see types of hybrid loans |
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hybrids start out at fixed rates loans,
adjusting to ARM after a set period
of years.
view how interest rates work with hybrids |
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these loans carry less risk than 1-year
ARMs and the interest rate is generally
lower than fixed-rate loans.
view notes on interest rates |
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since many homeowners remain into their
homes for about 7-10 years, combination
loans allow buyers to take advantage
of lower interest rates in the first
few years of the mortgage.
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gives the
homeowner a lower rate than fixed-rate
loans plus lower risk that the 1-year
ARMs
many consumers
select the Hybrids when they know
they will be in the home for a select
period of time
homeowners
use the Hybrid to lower their rate
and to qualify for larger loan amounts
Hybrids and
ARMs that are generally assumable
which is a plus when homeowners
plan to sell in the near future
ARMs rates
can decrease in declining interest
rate markets reducing your loan
payment
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hybrid rates
are typically higher than 1-yr ARMs
rates will
adjust at the end of the initial
period that could raise your payment
interest
rates will adjust annually after
the initial period making it hard
to plan your finances
in rising
interest rate markets, your monthly
payment can increase significantly
after the initial fixed-rate period
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make sure
the mortgage loan does not have
pre-payment penalties
check the
convertible feature of the ARM —
check conversion rate and cost of
conversion
ARM rates
are calculated by the lender adding
a margin to major index — the
margin is the bank's profit, try
to negotiate this margin down
negotiate
with the lender on any up-front fees,
especially fees for convertibility
and that are assumable
if you can
afford the monthly payment on a
15-year loan, you will pay substantially
less money than on the 30-year loan
— plus your home will be paid
off in half the time — see
calculation
view our program to help payoff your mortgage in 1/3rd of the time saving your thousands in interest
— plus imagine how to use your mortgage payoff bonus to plan for college, retirement, other
see how the mortgage payoff plan works
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Types
of Hybrid Mortgage Loans
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30/3/1
30/5/1
30/7/1
30/10/1
30/3/1 ARM is a 30 year loan with a
fixed interest
rate and payment for the initial period
of 3 years. At the end of 3 years, the
interest rate and payment changes once
each year for the remaining period of
the loan.
30/10/1 ARM is a 30 year loan with a
fixed interest rate and payment for
the initial period of 10 years. At the
end of 10 years, the interest rate and
payment changes once each year thereafter
for the remaining period of the loan.
The 30/3/1 will have a lower initial
rate than the 30/10/1. The higher the
delayed adjustment period, the higher
the interest rate.
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15/3/1
15/5/1
15/7/1
15/10/1
These are the same loans with 15-year
terms instead of 30 years.
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The most common:
30/3/3
15/3/3
30/5/5
15/5/5
30/3/3 ARM is a 30 year loan with a
fixed interest rate and payment for
the initial period of 3 years. At the
end of 3 years, the interest rate and
payment changes once every 3 years for
the remaining period of the loan.
15/5/5 ARM is a 15 year loan
with a fixed interest rate and payment
for the initial period of 5 years. At
the end of 5 years, the interest rate
and payment changes once every 5 years
for the remaining period of the loan.
If interest rates shoot up at the end
of your initial fixed-rate term, your
adjustment rate will be set at a high
rate during the period you selected.
Likewise, if interest rates decline,
you could set yourself in a nice interest
rate position.
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ARM
Components of Hybrid Loans
The
ARM components include the following:
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the ARM begins with a base number which
is tied to an published index that can
go up or down.
Two widely used ARM indexes are the Treasury
Rate Index and Cost of Funds Index.
There is more information
below about these index rates and how
they are determined.
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the margin is the additional amount that
the lender adds to the index to derive
the Interest Rate that is charged for
the loan.
The margin covers the lender's cost and
profit. The margin may varies between
1.5 to 3.0 percentage points.
the initial rate is the current prevailing
rate at the time that you lock-in your
position, which is generally one to three
percentage points lower than the prevailing
30-year fixed loan rate.
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the adjusted interest rate over the life
of the loan.
New interest rate is calculated at the
time of adjustment
New Interest Rate = index + margin
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the time between the interest rate is
scheduled to change. The ARM can change
every six months, annually, every three
years, or every five years.
- an ARM with an adjustment
interval of six months is called
a 6-month ARM.
- an ARM with an adjustment
interval of 1 year is called
an 1-Year ARM.
- and so forth
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At the time of adjustment, your lender
will recalculate your loan payment under
the new interest rate and remaining term
on the loan.
let's say that you close on 1-year ARM
at 5.5% for 30 years. Your monthly payment
during the first year (full 12 months)
will be as follows:
| Borrows Amount: |
$100,000 |
| Interest Rate |
5.5% |
| Payment Term |
30 Years (360 months) |
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| Monthly Payments Yr-1 |
$567.79 |
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your ARM will adjust and reflect the new
interest rate. Your lender will then recalculate
your new monthly payment using a 29-year
term:
| Borrowed Amount: |
$100,000.00 |
| (less) principal
paid Yr-1 |
$1347.09 |
| New Borrowed Amount |
$98,652.91 |
| New Interest Rate |
6.0% |
| Payment Term |
29 Years (548 months) |
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| Monthly Payments Yr-2 |
$598.83 |
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interest rate caps protect the consumer
in the event that interest rates rise
too rapidly. There
are lifetime caps and adjustment rate
caps. Make sure your understand these
caps when finalizing your loan decision.
ARM index rate: 4.5%
ARM margin: 2.5%
Life-Time Cap: 4%
Current Interest rate: 7.0% (index rate +
margin)
The ARM index rate has jumped
to 8%
The new interest rate equals
8% + 2.5% = 10.5%
The life-time cap limits the
new interest rate to: 4.5% +
4% = 8.5%
ARM index rate: 4.5%
ARM margin: 2.5%
Periodic Adjustment Rate Cap:
1%
Current Interest rate: 7.0% (index rate +
margin)
The ARM index rate has jumped
to 6%
The new interest rate equals
6% + 2.5% = 8.5%
The adjustment rate cap limits
the new interest rate for the
adjustment period to:
4.5% + 1% = 5.5%
So your new rate will be limited
to:
5.5% + 2.5% = 8.0%
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limits the payment amount the consumer
needs to pay at time of interest rate
adjustments.
payment
caps may not provide enough payment to
cover the required interest charges during
rising interest rates. Under this condition, the consumer
will experience negative amortization
— where the interest amount not covered
is added to the principal of the mortgage
loan.
if
your payment cap limits your monthly payment
to $1050 when the true payment should
be $1250 due to ARM rate adjustments,
the unpaid $200 will be added to the principal
mortgage loan balance for later payment.
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- Lenders on the
East Coast and Mid-West typically
use the Treasury Rate Index:
which
indices are the weekly or monthly
average yields on U.S. Treasury securities. These indexes reflect the state of
the economy and are more volatile
as they move with the market.
Treasure rate index is reported by
the Federal Reserve:
http://www.federalreserve.gov/.../H15/update/
- Lenders in the
West are more likely to use the Cost
of Funds Index:
which is published
monthly by the Federal Reserve Bank
of San Francisco.
11th District Cost of Funds Indices:
http://www.fhlbsf.com/cofi/
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LIBOR
(London International
Bank Offering Rates) as published by the
WSJ or Fannie Mae.
More information about the LIBOR index from www.hsn.com:
http://www.hsh.com/indices/libor.html
The other 20% or more ARMs may use a variety
of indexes that may include CDs index,
PRIME Rate, the lender's own cost of funds,
and other.
Make sure you check with your lending
institution on the type of index they
use.
View current average
index rates from www.hsn.com:
http://www.hsh.com/index.html
What moves interest
rates:
http://www.hsh.com/.../mortgage_movements.html
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some lenders will entice borrowers with
a teaser rate. Note that at the end of
the teaser rate, lenders typically adjust
the rate to the maximum amount. Make sure
you calculate your monthly payment at
the potential maximum rate.
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at each adjustment period, lenders must
recalculate your monthly payment at the
new rate, remaining term, and existing
mortgage balance after all existing payments
and pre-payments made on the mortgage
loan.
Lenders do make mistakes and overcharge
ARM borrowers.
to make sure
you are not overpaying or underpaying
your ARM mortgage. This requires you to
calculate your new payment with the new
rate (based on prevailing index and lender
margin), remaining term and mortgage balance.
Download our amortization worksheet to
help you in that calculation: click
here
Learn about mortgage auditing services:
http://www.mortgagemonitor.com/
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