Hybrid Mortgages

Hybrid mortgages, also called hybrid loans, are mortgages situated in between adjustable-rate and fixed-rate mortgages.  A loan for a hybrid mortgage starts out with a fixed rate for a fixed amount of time.  At the end of the fixed period the interest rate can be adjusted, usually to a higher rate.  Further adjustments can also be made on a yearly basis.  Hybrid loans are a good choice for those who want the lower cost offered by adjustable loans without the early risk of an interest rate hike.

Advantages and Disadvantages

The interest rate during the fixed period of the hybrid mortgage is lower than it would be for a fixed-rate loan during the entire term.  Also, the possibility of a higher interest rate is delayed for three or more years.  This is comparable to an adjustable-rate mortgage where the risk of an interest rate hike is possible in less than a year.

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There are some disadvantages to having a hybrid mortgage.  The original interest rate for a hybrid mortgage will be higher than it would be for an adjustable-rate mortgage. Probably the biggest disadvantage would be the increase in the monthly mortgage payment caused by the interest rate adjustment at the end of the fixed period. 

Details to Consider

If the home is going to be lived in for a long time, a hybrid mortgage might not be right for you since the interest rate is bound to change while you are living there.  If the interest rate were adjusted considerably, would you be able to keep up with your monthly mortgage payments?   Think carefully before making a final decision.