Have you been considering mortgage refinancing to take advantage of historically low rates but simply haven’t gotten around to it? Hybrid ARMs are often overlooked as an excellent short-term mortgage option offering substantial savings. Here’s what you need to know about Hybrid ARMs to help you make an informed decision on your next home loan without leaving cash on the table.
What Are Hybrid Adjustable Rate Mortgage Loans?
Hybrid Adjustable Rate Mortgages are considered “hybrid” because they are fixed for an initial period of time before the interest rate and payment starts resetting. Because adjustable mortgage rates are usually quite a bit lower than comparable fixed rate home loans the savings can be substantial.
Hybrid ARMs are often offered as 3/1, 5/1, or 7/1 adjustable rate mortgage loans. The designation means the loan is fixed for the amount of time in the number and will reset based on the second number on the loan’s anniversary date. In the case of a 7/1 ARM, the mortgage is fixed for the first seven years and then resets every year on the anniversary date after that.
The risk with any Adjustable Rate Mortgage loans is that if interest rates, particularly those tied to the LIBOR index in Europe go up, your payment will go up also. (ARM home loans commonly base their interest rates on the LIBOR index) If you refinance at the end of the fixed rate period, provided your Hybrid ARM doesn’t have a prepayment penalty you can save yourself a nice chunk of cash.
How Much Could You Save With a Hybrid ARM?
If you were to choose mortgage refinancing with today’s best mortgage lenders using a 5/1 Hybrid Adjustable Rate Mortgage on a $350,000 home loan at 3.5% your savings (over a fixed rate mortgage) will be $200 a month. Over the fixed rate period of the ARM your savings balloon up to $12,000. As long as your Hybrid Adjustable Rate Mortgage does not have a prepayment penalty you could refinance again or sell at the end of five years. Hybrid ARMS are a popular choice for real-estate investors for this reason.
Avoid Common Mortgage Mistakes
One of the biggest mistakes people make refinancing their homes is focusing on getting the lowest possible refinance rates at the cost of fees. The fees you pay closing on your new home loan make or break the deal you’re getting. If you pay too much for the origination fee or fall for unnecessary discount points it can be difficult, even impossible to recoup your out-of-pocket expenses from mortgage refinancing. If you’re not able to break even on your closing costs before you sell or refinance again you’ll be losing money no matter how low your refinance rates.
You can learn more about avoiding lender junk fees and unnecessary discount points to get the best deal your next home loan by checking out my free Underground Mortgage Videos.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
