A hybrid mortgage, also called a fixed-period ARM, combines features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10 years), and is typically amortized over 30 or 40 years. After the fixed rate term ends, the loan converts to an adjustable rate mortgagge for the remaining term.
The appeal of a hybrid mortgage is that the initial fixed rate is considerably lower than the rate on a mortgage that's fixed for a full 30 years; the shorter the initial fixed period, the lower the initial interest rate. This type of mortgage may be prudent for borrowers who prefer the security of a fixed interest rate but also believe they will not hold the subject loan for its entire term. Rather than pay the higher rate associated with a full 30 year fixed rate loan they can choose a hybrid mortgage with a fixed term that closely matches the amount of years that they expect to keep the loan.
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