The Secret of Hybrid ARMs: The Best of Conventional and ARM Loans

There are two main types of mortgages on the market: fixed-rate (or conventional) and adjustable-rate (ARM). The Hybrid ARM combines the best of both of these.

With a fixed-rate loan, your interest rate will be fixed for the life of your loan, usually 15 or 30 years. This type of loan is the most popular. The 15 year loan will cost you a little more monthly, but you will save thousands in interest over the life of the loan. The 30-year loan has lower monthly payments but will cost you more in interest over the 30 years.

The ARM's interest rates will fluctuate. The fluctuation is caused by changes in the financial index it is tied to. Many ARMs are tied to highly variable foreign indices. ARM rates can change more than once in a given year. So if the market goes up twice, then your rate goes up twice, as well. You'll start with a lower interest rate than a fixed-rate mortgage but have the potential of going much higher over the course of the loan. The plus side is that if interest rates go down, you will also reap those benefits.

A Hybrid ARM gives you both a fixed period and an adjustable period. The fixed period usually lasts 3 or 5 years. This will provide you with stability over this time. After the initial period, your interest rate will change. This is why lenders can provide greater rates...because you are taking on some of the risk. With a Hybrid ARM, however, your interest rate will only adjust once per year.

There are two types of caps with a Hybrid ARM: a yearly cap and a lifetime cap. The yearly cap is 1%. This means that if in any given year the interest rates climb more than 1%, you will be protected. If the index your loan is tied to climbs, let's say, 4%, you will only be exposed to 1% of that.

The lifetime cap is almost always 5%. If you start at 2.25%, you'll never go above 7.25%. With the yearly cap, it will take you 8-10 years to get to that cap. In the meantime, you will be saving a lot of money over those folks in regular ARM loans.

In the near future, interest rates are going to start to rise. Experts aren't sure just how fast they'll increase, but they're sure they will go up. Talk with a VA-approved lender to find out about the current rates and how you can save money with a Hybrid ARM.

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