Hybrid Loans

Hybrid loans or what lenders sometimes call intermediate ARMs start out like a fixed-rate loan (the initial rate may be fixed for three, five, seven, or even ten years) and then the loan converts into an ARM, usually adjusting every six to twelve months thereafter.

Loans called 7/23s (which are fixed for the first seven years and then have a one-time adjustment and remain at a fixed rate for the remaining length of the loan term) are also available.

When to consider hybrid loans

If you want more stability in your monthly payments than comes with a regular adjustable, and you expect to keep your loan for no more than five to ten years, a hybrid (or intermediate ARM) loan may be the best loan for you.

The longer the initial interest rate stays locked in, the higher it will be, but the initial rate of a hybrid ARM is almost always lower than the interest rate on a 30-year fixed-rate mortgage. However, because the initial rate of hybrid loans is locked in for a longer period of time than the six-month or one-year term of regular ARMs, hybrid ARMs have higher initial interest rates than regular ARM loans.

During periods when little difference existed between short-term and long-term interest rates, the interest-rate savings with a hybrid or regular adjustable (versus a fixed-rate loan) were minimal (less than 1 percent). In fact, during certain times, the initial interest rate on a seven or ten-year hybrid was exactly the same as on a 30-year fixed-rate loan. During such periods, fixed-rate loans offer the best overall value.

To evaluate hybrids, weigh the likelihood that you'll move before the initial loan interest rate expires. For example, with a seven-year hybrid, if you're saving, say, 0.5 percent per year versus the 30-year fixed-rate mortgage, but you're quite sure that you will move within seven years, the hybrid will probably save you money. On the other hand, if you think that there's a reasonable chance that you'll stay put for more than seven years, and you don't want to face the risk of rising payments after seven years, you should opt for a 30-year, fixed-rate mortgage instead.