Should I Get a Hybrid ARM Loan?
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November 4, 2022

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If you’re in the market to buy a home, you may have encountered a type of mortgage product called a hybrid ARM loan. 

No, it isn’t some green energy auto loan, but it could keep a little more ‘green’ in your pocket.

Mixing the best aspects of two different loan types, hybrid ARMs can save you money each month while providing a steady, predictable payment.

See if you qualify for a hybrid ARM loan.

What’s in this article?

What is a hybrid ARM loan?
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Hybrid ARM vs 30-year fixed
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FHA and VA hybrid ARMs
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SOFR vs LIBOR
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Who are hybrid ARMs good for?
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Start your hybrid ARM
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What is a hybrid ARM loan?

A hybrid adjustable-rate mortgage (ARM) or fixed-period ARM, is a type of loan that combines the characteristics of an adjustable-rate mortgage and a fixed-rate mortgage. 

A hybrid arm loan has a fixed interest rate during the loan’s initial period, followed by an adjustable rate period.

Once the fixed-rate portion of your loan ends, the interest rate on your loan changes on a set schedule.

In the loan agreement, there will be a ‘reset date’ when the loan switches from a fixed rate to an adjustable rate period. The adjustments to your mortgage rate are based on an index and a margin.

The most common version of a hybrid ARM loan is the 5/1 ARM

As the name suggests, this loan has an initial fixed-rate term of five years, followed by an adjustable-rate term that resets every 12 months.

Hybrid ARM vs. 30-year fixed mortgage

When considering your borrowing options, consider making a list of pros and cons for these two loan types: a hybrid ARM and a fixed mortgage. 

Both types of loans can be either conventional or non-conforming, but there are some key differences between the two.

Fixed-rate mortgages

A fixed-rate mortgage includes a set interest rate that will not change for the life of the loan. 

There are two primary fixed-rate mortgages: 15-year and 30-year terms; the 30-year version is the most popular.

The significant advantage of fixed-rate loans is—since your interest rate never changes—your monthly principal and interest payments remain unchanged throughout the life of the loan. 

Household budgeting becomes much easier when you know what you pay for your home loan each month.

Hybrid adjustable-rate mortgages

Hybrid ARMs, however, have an interest rate that may change after a set period.

Typically, a lender will express this type of loan with two numbers, such as 5/1 or 10/1

A 5/1 hybrid ARM has a fixed rate period of five years, where your rate won’t change. In a 10/1 ARM, that period is 10 years. 

With a 5/1 or 10/1,  the rate can change annually on the original agreement date after the initial period is complete.

Most ARMs have a set cap on how much a borrower’s interest rate can increase yearly. Frequently, there’s also a lifetime increase cap. But regardless of these limits, the adjustment period still contains some risk—rates may go up or down.

Stoke your mortgage knowledge.

FHA and VA hybrid ARMs

Beyond the standard type of hybrid ARMs, there are two other types of these loans: VA hybrid ARMs and FHA hybrid ARMs.

VA hybrid ARM

VA hybrid ARMs are designed for eligible active duty service members, veterans, qualifying reservists, and those who are classified as surviving spouses by the VA.

Like other VA loan types, these mortgages are some of the few options for you to buy or refinance your home with no down payment or equity amount.

FHA hybrid ARM

As mentioned above, a new interest rate is calculated after the reset date based on the margin set by the lender plus an index. The index used by the Federal Housing Administration (FHA) is the Constant Maturity Treasury (CMT). FHA ARMs are offered in five varieties: a standard one-year ARM plus four hybrid ARMs with an initial period of 3, 5, 7, or 10 years. These lengths are typical for most ARMs. They also feature two interest rate caps that provide against extreme rate changes (low or high) and a life of the loan cap.

Start your FHA hybrid ARM.

SOFR vs. LIBOR

Regulators recently uncovered flaws in the accuracy and security of the LIBOR index. Because of this development, Fannie Mae and Freddie Mac will no longer approve LIBOR-based ARMs.

Instead, they will use the more accurate SOFR benchmark that resets every six months instead of annually. The SOFR index is considered to be more accurate and resistant to manipulation.

Who are hybrid ARMs good for?

Hybrid ARMs are best suited for homebuyers who plan to live in their homes for only a short time—selling before the end of the initial period.

Also, many borrowers choose to refinance their homes before the interest rate adjustment period begins. This move could save the borrower thousands of dollars compared to a fixed-rate mortgage.

Some additional advantages of this loan type include the following:

  • A lower introductory rate compared to conventional fixed-interest mortgages
  • If interest rates drop before the reset date, the monthly payments could decrease

Some of the disadvantages include the following:

  • There is the possibility when the reset date arrives, there could be a rate increase. If the increase is quite dramatic, it could make the affordability of monthly payments more difficult.
  • Calculating an ARM can be more complicated than a non-changing fixed-rate loan.

See how much you can save with a hybrid ARM

A hybrid ARM (especially a 5/1 ARM) can be a good choice for homebuyers who are looking for a short-term mortgage or are confident in their ability to get refinancing before the reset date.

If rates remain low and the index rate has minor adjustments, hybrid ARMs can save you money over time versus a fixed-rate loan. 

Homeowners who refinance before the initial period expires could potentially save thousands of dollars compared to the same period under a fixed-rate mortgage.

Check your hybrid ARM eligibility.
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