The Hybrid Adjustable Rate Mortgage: Four Key Questions to Ask
Despite all the bad news we've heard lately about the financial trouble people have gotten into with payment-option and interest-only adjustable rate mortgages, conventional Hybrid ARMs remain a legitimate consideration. Hybrid ARMs have been around for two decades and still can make sense today for people who don't plan to stay in their homes for more than the initial low-rate period of the loan. Of course, understanding how the interest rate is adjusted and how that will affect your payments is critical. Here are four questions to ask if you think a Hybrid ARM might be right for you.
How Long Does the Fixed-Rate Period Last?
Hybrid ARMs feature fixed-rate periods at the beginning of the loan, followed by interest rates which most commonly change once per year thereafter. A 5/1 Hybrid ARM will have a fixed interest rate period of five years after which the interest rate will start to change every year. A 7/1 Hybrid ARM would have a mortgage rate for the first seven years and then annual adjustment, and so on. Some Hybrid ARMs have six-month or even three-month adjustment periods, so you'll want to ask the lender and read the documents carefully to make sure you know how yours will work in the future.
The Adjustable Mortgage Rate: What Index is Used?
When the rate is due to change, it will be adjusted according to the value of a specific economic indicator, such as the yield on a given Treasury Security, or the London InterBank Offered Rate (LIBOR). One index can move very differently from another, even in the same market conditions, so find out which index is used to govern the loan.
What is the Mortgage Lender's Margin?
On top of the value of the index, mortgage lenders tack on a markup, called a margin. Find out the margin amount on the ARM. The index plus margin equals the mortgage rate you'll pay, subject to any interest rate limitations, called caps.
What are the Mortgage Interest Rate Caps?
There are three types of caps to consider with a Hybrid ARM: a cap on how much the interest rate can move in the first adjustment (the "initial" cap), a cap on how much the interest can move in each of the other adjustments (the "periodic cap"), and a cap on how high the interest rate can ever move, relative to where you started (the "life cap"). It's a good idea to find out all three and do some calculations on what your mortgage payments would be if the interest rate adjustments rise enough to hit the caps.
As you mull mortgage possibilities, check today's mortgage rates and learn more about adjustable rate mortgages on HSH.com.